Break the bank: convincing them to approve your loan
Wednesday, February 29, 2012
You've got to spend money to make money - or so the saying goes. And it certainly rings true in the print industry. If you don't put your money where the advancing technology is, you can expect to see your profits plummet. But with Bank of England statistics showing lending to SMEs is down 6% year-on-year, how can companies get their hands on the money they need to invest?
The good news is that the big names in banking claim that, despite the current climate, they’re as keen as ever to offer business loans. HSBC and Lloyds claim they are approving 80% of applications and RBS says it is sanctioning 17 out of 20. The problem of lack of investment may not be down to a lack of funds then, according to Mike Conroy, HSBC commercial bank strategy implementation manager.
"It’s not so much access to money that’s the problem, but that the economic climate is making businesses reluctant to invest," he says. "In printing, equipment can be so expensive that companies don’t want to get into debt not knowing how stable their finances will be."
While it may be true that the banks do have money available – and that some printers may be reluctant to use it – that does not mean it is easy for those printers that do want to invest to prise open a bank’s wallet. As those in the industry who’ve recently applied for loans will testify, and as the banks will concede, the process of securing a loan for capital investment has become more demanding of late. So while those approval rates above appear encouraging, they do not reflect just how hard printers have to work to get an application passed.
"We’ve been in business for 25 years and often had finance on equipment. But we’ve taken out one or two loans recently and the climate has changed considerably," says Tim Hill, managing director of wide-format printers Speedscreen. "Even our bank, to whom we’re a known quantity, is scrutinizing each deal in much more detail."
"Like all banks, we will ask more questions now," admits Peter Ibbetson, chairman of small businesses for RBS. "We will spend a lot of time going through a business’s financial forecasts, challenging them. And that’s the right thing to do in difficult economic times. There’s no merit in giving a loan if they can’t repay it."
These days, proving you can pay is not just about some clever accounting, either. Banks are increasingly willing to test an applicant’s confidence to put their own money where their mouth is, according to Hill.
"For our last two loans, I’ve had to provide a personal guarantee," he explains. "It has been about 15% of the deal and of course that makes it onerous."
Even a personal guarantee might not sway the banks hand, however, with some lenders seeking even more security by looking to involve the manufacturer.
"My bank informed me that if you want a loan on a piece of high-end digital kit, then the underwriters are now looking for buy-back arrangements with manufacturers, guaranteeing that they’ll buy the equipment back at a set value if your company goes bust," says Hill. "It’s going to be hard to get manufacturers to agree to that, so it could be increasingly difficult to get loans in those cases."
While bank loans are still a viable source of finance, what will print companies do if they become ever harder to secure? Firstly, remember that a traditional loan isn’t the only option available from banks.
"Involve the bank in your plans," says Anthony Thomas, senior manager of public affairs commercial at Lloyds Banking Group. "We are able to advise on whether a typical bank loan is the best option, or whether it would be better look at asset-backed lending [some banks will take on the risk of the asset rather than looking for a manufacturer buy-back agreement], or a government-backed scheme."
Private financial companies, of course, offer their own antidote to the typical bank loan. And you might expect to see more coming onto the scene. "I think we’ll see new companies with cash on their balance sheet beginning to lend into the marketplace," says Gerry Hoare from finance company DealBureau. "Their rates will be higher, but you’ll probably get more flexibility and more specialised services."
Others think that the future of finance lies with manufacturers. "HP has been very successful in the past 18 months, because it offers its own finance and there’s not the same stringent criteria as with banks," says Hill. "So it will be quite interesting to see if other manufacturers end up following suit."
In the short term, though, banks may not be such a bad place to go. "It has never been cheaper to borrow money from banks, because most SME lending is linked to the Bank of England’s base rate, which is at an all-time low, at 0.5%," says Thomas. "So it is a good time to borrow and to be fixing rates. Get that forecast together, get to your bank and get set for Drupa."
- This is the first feature of our three-part pre-Drupa finance series. Part two looking at finance from kit suppliers will appear in the 6 April issue of PrintWeek, while the final instalment on asset based lenders will be published on 4 May
PLAN FOR SUCCESS
With banks being more cautious about signing off on loans, what can you to do convince them that you’re a good case for investment? Try these tactics:
Be clear "We see a lot of people who, unbelievably, don’t really know how much money they need or what it’s for," notes Conroy. For example, if you’re asking for money to invest in new presses, do you need funds for increased paper supplies too? "Give the bank confidence that you have thought things through," says Conroy.
Prepare a (sensitised) plan "We’d want a cashflow forecast to show that the business can pay back the money. And we’d test it against accounts from the past few years," says Ibbetson, "If, for example, your debtors have always paid in 60 days but your forecast relies on them paying in 30 days, we’d question that." Next, sensitise your plan. "If you’re forecasting 5% growth, show what you will do if you have a 5% drop," says Hoare. "If you can demonstrate that you’ll still be able to afford the loan, that will give the bank comfort. When sensitising, think about everything that could have an impact – your competition, your location, even positives such as your business suddenly doubling in size." For the banks, the numbers adding up is the most important thing – but a slick PowerPoint presentation and organised documents create a good impression.
Keep it concise "Sometimes you can read pages of a business plan and still not be sure what the business does or wants, so be clear and concise," says Conroy. Hoare adds: "If you can get everything on five pages that’s enough. Or have a two-page summary with 20 pages to back it up. If they’re interested, they will ask for more."
Use your head "Don’t base your plan around manufacturer claims," warns Hill. "They may say a machine will do 250 square metres per hour, but that won’t generally produce a quality that’s marketable. My policy is to divide their numbers by two, or test the machines and make your own assessment. It will be important to the bank that you have not just relied on the manufacturers’ promise."
Sell your sector "You can’t expect bankers to know everything about the type of equipment you want to invest in," says Hill. "The reality is that banks are not that interested in lending on certain types of equipment and in my experience that includes digital printing kit. They need to have a better understanding of the industry. While there may have been high depreciation on equipment in the early days (which left banks lumbered with worthless equipment when companies defaulted on loans) that has levelled off. So make them aware of that." Hoare believes that some banks are also concerned that there are too many companies in the printing sector and not enough work. So address that in your plan – why will your firm continue to prosper?
Consider seeking advice A broker or financial advisor can help with everything from getting your business plan together to presenting it to different investors. "It can be helpful for small businesses where the owner has to deal with the finances and the day-to-day running of the company," says Hoare, whose firm offers brokering and financial advice. "For larger companies it’s a time-saver, as it could take weeks to prepare the information for the lenders and go through a ‘beauty parade’ with funders." Another crucial benefit is their specialist knowledge. "Every financial firm goes through cycles. So while one bank might be backing away from lending, another might be stronger. We’re up to date with which ones are in a good position," says Compass Business Finance director Mark Nelson. Of course, brokers and advisors do come at a cost and while banks are happy to work with intermediaries (although they’re not a necessity), they warn against letting them stand in for you. "Remember, it’s you the bank wants to be convinced by – not your intermediary," notes Conroy. Another good – and free – place to go for information is the website betterbusinessfinance.co.uk. You can swot up on different loan types, what banks look for in applications and how to appeal against a rejection.
Think outside the box Asked your bank for a loan and been rejected? Don’t panic. "Your incumbent bank isn’t always the best place, as they don’t want too many eggs in one basket," says Nelson. "They might not lend to you because you’ve got pre-existing loans, whereas another financial institution will."