Home' Charter : 1011 Charter Contents 22 Charter I October 2011
Business > SME debt financing
During the GFC there was a widespread
belief among small and medium-
enterprises (SMEs) that banks had shut their
doors to their business. Many SMEs also
felt the banks were being unfairly tough with
many demanding they put up their homes as
Global markets are reeling again, but banks
are more happy these days to lend to SMEs.
Yet while the banks are open for business,
many SMEs are reluctant to borrow. Some
were burnt during the GFC and others are
intimidated by the complexity of borrowing.
“SMEs have lost their appetite for debt,” says
Sue Prestney FCA, principal at MGI, which
specialises in advising SMEs and writer of the
Enterprise column in Charter.
But debt remains a crucial source of
funding for business. It gives SMEs the
frepower to grow, make acquisitions and
increasingly to fnance ownership succession.
For businesses which may need to tap
debt funding to grow, it is crucial to get an
understanding of how banks lend to SMEs,
what is required to get a loan, who should
advise you and how to strengthen your
negotiating position is crucial.
“Ultimately it comes down to relationships
and people and not just fgures,” Prestney
says. “The bank wants to assess how good
you are as a manager of your business. They
will want to meet you and have confdence
you look like a person who knows what
Bank lending to SMEs ranges from
overdrafts and lines of credit, which provide
short-term working capital, to business
loans which provide upfront fnance to fund
long-term investments. There is also specifc
fnancing available for particular needs, such
as leasing and debtor fnance.
During the GFC many banks cut lending to
SMEs and toughened lending criteria.
Bank lending to SMEs has freed up but
Prestney says the conditions under which they
lend are still fairly tough. “They (banks) have a
huge appetite for lending at the moment but
the rules are staying the same – they’re not
freeing those up to any signifcant extent.”
Carl Walsh, chief executive of accounting
frm WHK Melbourne, says his frm has found
a divide in the SME market when it comes
to debt. He says the “Ms” – the medium size
enterprises – want debt funding. But the
“Ss” – the smaller frms with turnover less
than $2 million a year – are avoiding debt.
“The banks are making it diffcult for Ss in
particular,” he says, adding that while banks
are publicly saying they’re freeing up lending
“we’re fnding they’re actually making it diffcult
for SMEs overall to get access to funding”.
HOW TO GET FUNDING
Walsh says part of the problem is that many
SMEs don’t go about seeking debt the right
way. So what is the right way? There are a
series of steps that SMEs need to get right,
including working out how much you need
to borrow, what type of debt is required, who
to approach at the bank, how to present the
right information, how to provide the right
level of security and hopefully securing the
best terms by shopping around.
Some SMEs do choose to make fnance
applications themselves. “If they’re going
to do it themselves, then they have got to
give it time,” Walsh says. The key is to fll
out applications so they’re comprehensive,
understandable and accurate. “It sounds
very simple, but at a basic level that’s not
happening,” he says.
Many SMEs choose to use advisors,
either their accountant, business advisor or
business broker. Walsh says many advisors
are prepared not to charge for advice on debt
applications. “I know in our business and a
Debt financing for small business can be a tough process,
so it pays to know what makes the banks tick.
Story Ben Power
Ultimately it comes down to relationships
and people and not just figures
lot of businesses like us, we see that as a
value-add and wouldn’t charge. I wouldn’t
underestimate the power of just asking.”
The frst step is to be clear about how
much money you need, why you need it,
and for how long you need it. “That should
come from your business plan,” Prestney
says. “While banks will not necessarily ask
to see a business plan, they will usually want
you to provide three-way budgets which
are budgeted proft and loss, cash fow and
projected balance sheet.”
Advisors can help with the second step:
working out who you should be approaching
at the bank. “We have relationships with
most of the banks,” Prestney says. “We
know which people in the bank deal with
what size clients and we know what each
bank is attracted to and we know what sort
of fnancing they have available.”
Brendan Wright, NAB’s general manager,
small and emerging business, says SMEs
should meet with a small business banker.
WHK’s Walsh says there is no harm in
asking the banker for guidance, including
things like what you need to emphasise
or give more detail on in the application.
“Bankers at the branch know more what
their credit team is looking for than most
people,” Walsh says. “The person at
the branch is incentivised to write more
business. It’s in their interest to help you.”
The next step is to understand what
banks are looking for. Wright says good
quality, well managed and tightly run
businesses with a clear strategy and
sustainable business model will always
enjoy the support of their bank.
As a general rule, lenders look at three
key areas. Firstly, they assess the SME’s
ability to make a regular loan repayment.
They then assess the business risk – the
ability to ultimately repay the debt, factoring
in any other debts which might already exist.
Finally, they look at the level and nature of
the security being offered if a business can’t
repay the loan.
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