Following the financial crisis, is it worth businesses turning to banks for finance?

Many SMEs are missing out on bank lending simply because they perceive banks’ policies to be more negative than they actually are, according to research. The negative headlines on bank lending since the credit crunch appear to have only accentuated the lack of mutual understanding between banks and SMEs.

A report commissioned by accountants Kingston Smith, entitled Bank Finance- lost in translation has highlighted a number of misunderstandings between banks and SMEs that appear to be standing in the way of businesses from obtaining bank finance.

The research revealed that the majority of SMEs seeking finance are choosing to avoid banks because they believe traditional institutions are not interested in lending to them. This is despite the fact that the vast majority of SMEs who seek finance from banks are successfully securing the backing they need.

The report’s key finding has also been echoed by a survey commissioned by the British Bankers’ Association (BBA). This survey put actual success rates for bank finance applications at 67% versus SME expectations that banks would say ‘yes’ at just 37%.

But the Kingston Smith report found that both sides were to blame for misconceptions, with banks not providing enough clarity on the loan process. At the same time, many SMEs were failing to present realistic business plans and demonstrate suitable financial acumen.

The report recommends that banks should provide clearer details of their loan criteria to SMEs, more information on how different factors will impact their loan applications, as well as providing more feedback on loan decisions. SMEs, meanwhile, should prepare realistic business plans and seek expert advice before they are submitted.

Yvonne Gorman, owner of Derby-based print firm Essential Print Services Ltd is one who believes SMEs themselves are often at fault.

‘There’s a lot of negative stigma, but if you have the right business plans in place and realistic cash flow forecasts then the banks will lend. If you’ve had a bad track record though and you’re not very good with your finances then they are not going to provide finance,’ said Mrs Gorman.

Nonetheless, the report commissioned by Kingston Smith also highlighted the drop in the number of successful applications for bank finance in the aftermath of the financial crisis. Before the economic crisis of 2008 as many as 90% of SMEs seeking bank finance were successfully obtaining it, a figure which had fallen to around 70% by 2011. The figures help explain the huge growth in alternative sources of finance such as crowdfunding over recent years.

Adam Price, founder of VouchedFor.co.uk, a website which helps people find financial advisers, believes many SMEs are still likely to be wasting their time talking to banks if they are in the start-up stage.

"Speaking on behalf of a technology start-up, bank lending is simply not an option. Banks will only lend once you are profitable, and they do not have the capability to assess risk for early-stage businesses. At the start-up stage, friends, family and angel investors really are the only option," said Mr Price.

However, some banks appear to be fighting back. The BBA has launched its Better Business Finance initiative (www.betterbusinessfinance.co.uk) in association with Barclays, HSBC, Natwest, RBS, Lloyds and Santander. It promotes impartial information and practical online tools, aiming to encourage more SMEs to approach the banks for business loans.

Lloyds, for instance, claims to have already had some success in boosting lending to SMEs, having increased net lending by 6% in 2013 with a commitment to grow net lending to SMEs by a further £1 billion in 2014.

Andrew Naylor, area director at Lloyds Bank Commercial Banking believes SMEs should also make more use of government-backed initiatives such as the £3.2bn Regional Growth Fund (RGF) scheme.

‘With economic growth gathering momentum and the UK making a positive recovery, it is now more crucial than ever to have the backing of a bank that can understand the opportunities,’ said Mr Naylor.

Have your say: Have you managed to secure finance for your business from a bank? If so, what was your experience in dealing with them?