Are banks letting entrepreneurs down?

What is the role of our banks in funding ambitious entrepreneurs and high growth businesses, asks Rachel Emmerson, and are they letting down the engines of the UK economy?

Business banks get a fair amount of stick from entrepreneurs. They don’t want to lend. If they do lend it will only be with a personal guarantee. We never speak to the same person twice. I am made to jump through so many hoops, still to be told no. We hear this all the time in conversations with business owners, but are these criticisms fair?

There is no doubt that the relationship businesses have with their banks has changed. It is a change that was crystalised following the 2008 crash when many lenders had their fingers burnt. The role banks play in society was questioned with regulations tightened, capital adequacy rules strengthened, and many banks retreating into less riskier products.

And it is the risk question that is front and back of mind with any lender.

Let’s take a step back. Not all businesses are the same. The needs of an early-stage business will be very different to one in a growth phase. The relationship a bank has with its corporate customers will change over time.

Banks are, on the whole, good at providing the funding small businesses need. That funding is varied and will include overdrafts, loans, invoice funding and asset-backed borrowing. For many businesses that is all they need.

And it should also be remembered that banks were very quick to step up and support businesses throughout the COVID pandemic, albeit with government backing. 1.67m businesses borrowed a staggering £80.43bn through the Coronavirus Business Interruption Loan Scheme, Bounce Back Loan Scheme and other schemes with very few questions asked. Our own research, Shaping your future, suggests that 20% of businesses believe they will be unable to repay that borrowing.

Business banking is a competitive market, with challenger banks muscling in with new products and, in some cases, an apparent higher appetite for risk. High street lenders have responded with some operating incubator hubs, hot-housing businesses with the support and funding they need.

In many instances, banks will make very little or no profit at all from the provision of basic banking services.

Businesses can, therefore, no longer expect a dedicated business banker to be at their beck and call every time they have a question or concern. And banks, quite understandably, cannot be expected to understand the needs and drivers of all of their business customers. The expectation and offer are not always aligned.

Expectation

The bank’s desire for a balance of risk and reward is not always shared by entrepreneurs.

Research from Capitalise, a capital advisory service, suggests that entrepreneurs start looking for funding just seven days before it is needed and spend just 60 minutes researching how that business will be funded. Clearly that is not enough.

Lenders will want to see a clear roadmap for a business’s funding requirements. For high growth businesses, that roadmap needs to include early stage or seed funding, investment from the entrepreneur themselves, as well as expectations and the source for first and second round funding. All too often that is missing.

Then there is the question of risk and where that should rest?

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Many entrepreneurs believe completely that their new idea, product or service will change their town or city, industry sector, or even the world. And they might be right. But they will often baulk when being asked to sign a personal guarantee. They are also, often rightly, very nervous about betting the family home yet ask another business, a lender, to do so.

Lenders, put bluntly, want to see risk shared. Anyone thinking that is not the case is deluding themselves.

Risk capital equals equity

Banks, and certainly the high street banks, find it very difficult if not impossible under the current regulations to hold equity in a business on which they lend. Yet that does not mean that bank borrowing is not available for higher risk businesses. There are many specialist lenders prepared to back what many high street banks would consider too risky, with real estate development finance being one good example. Business owners should shop around.

Businesses in growth stage, typically cash hungry yet not always profitable, will need to look beyond banks to fund that growth. That is the role of the venture capital, private equity and family office investment communities.

Funding is exchanged for equity, with funders requiring a well presented strong strategic plan, a clear demonstration of key milestones achieved, detailed assessment of funding required and any appropriate due diligence to support the business case.

Banks, of course, want an open and honest relationship with entrepreneurs and ambitious businesses. They want to be that trusted adviser. Yet, naturally, business owners and leaders are sceptical.

Businesses often need that trusted adviser to guide them through the most appropriate funding channels and help them prepare. It is a role accountants have played for decades.

Personally, I am not so sure banks are failing entrepreneurs. They provide the service that most businesses need, challenge the ambitions of entrepreneurs and demand rigour. Those are the qualities that every successful business owner should cherish. The key is for business owners to understand how they can get the best from the system, and the most important message is to make a well thought through approach for funding at the earliest possible opportunity.

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Rachel Emmerson is a senior manager in the growth and funding team at accountants, business and financial advisers Kreston Reeves. She can be reached by email: rachel.emmerson@krestonreeves.com. Visit www.krestonreeves.com.