Banks are refusing me to lend to SMEs – what should I do? Dave Fishwick replies

I own a successful furniture business that has grown from £7m to £65m over the last 5 years.

We did this without taking on any long-term debt or equity partners – instead paying little in dividends and holding our balance sheet to allow for continued growth.

However, we have taken short term facilities with our bank such as Trade Finance which funds imports for 120 days and Bill Discounting which funds our sales ledger. Both are secured against our inventory or debtor’s book.

Last year, after we decided to invest significantly in our infrastructure with a new 400,000 square foot warehouse, a fleet of delivery vehicles, racks and forklifts, IT software and an e-commerce website, we asked our bank to look into some debt for in business. .

At the time of our initial meeting with our Relationship Manager and his Regional Manager, we were told that shouldn’t be a problem and the bank could look at 2x EBITDA as a term debt multiplier without too much trouble.

With EBITDA of £18/500k, ’19 / £1.5m, ’20 / 6m, ’21 / 13m and our forecast of ’22 / 5m, we thought that Some short term facility of around £10m as we have requested over five years – a £5m loan and £5m over 60 months repayment – will be agreed to give us the oxygen we need to continue to grow.

Our company’s balance sheet at the end of August 22 is £17.1m and I’m very proud to have started with £700 at the age of 19 and nothing else.

Anyway, I am not at all happy securing any term debt with our bank, I have been involved in discussions with several private lenders and trading companies who have all rejected our proposals saying they are too worried about the economic outlook.

Now we have a company in which I have invested everything, personally and professionally, and I have to fund myself entirely, privately, despite making serious profits, employing over 150 people and paying millions in taxes.

I’m so confused as to what to do and all the money guys seem so worried about the economic view that they are blind and will become a self-fulfilling prophecy if everyone stops lending. This seems to be the situation at the moment.

Surely I’m doing something wrong because it doesn’t seem possible that a growing business that is debt free and profitable is unable to secure financing? what can I do? By email.

Dave Fishwick, This Business Finance Physician, answers: Your problems bring to mind many problems with the current banking system as I see it.

During the recent financial crisis, many minibus sales customers were unable to secure financing because banks effectively turned off the lending spout through no fault of the customer.

It seems banks will only give you an umbrella when it’s sunny out, and then they’ll want to take it back when it starts to rain.

I have a true story here that proves your point. I was visited by the manager of my bank during the height of the financial crisis that began in 2008.

The conversation went something like: “Dave, do you need any extra money for anything at all?” And I said, No, you know I don’t; My clients need the money, not me.

Then he added, “Look, the government gave the bank this much money, to lend and we just want to lend it to people who we know maybe don’t need it, but we’ll definitely get it back from.”

She took him out of the office and said something along the lines of: “You need to loan that money to the people you’ve been saving for who need it most to save their business.”

I was so disappointed in the big banks that I started lending my own money to my clients, and they paid me back. After that I realized that this banking problem was not that difficult.

This led me to take a keen interest in banking and finance and eventually led to the founding of Dave Bank.

I hear what you have to say about a self-fulfilling prophecy that grim reports may lead to less lending, leading to an economic slowdown.

However, I remember hearing a similar argument made at the start of the 2008 crisis that if the media stopped reporting on a crisis, we could avoid it.

Unfortunately, by the time it was in the news, the damage was already done.

The situation was indeed beyond sentimental as we learned what a mess those in charge of the banking sector and those who were supposed to oversee had created.

The more complex the banking business model, the higher the risk.

We just need to reconsider the banks that either failed or would have failed without the massive bailouts in the 2008 crisis. They all said they were in good financial health until they weren’t.

I remember hearing that even the president and chief of failed banks did not understand the risks of some of the complex practices and products in which they were dealing.

Retail banking should follow a simple and secure business model; To take money from the savers and lend it out at a slightly higher rate, with the difference being the profit, which can then be used to fund the running operation of the business.

Problems began in the banking system as this model fell out of fashion in favor of high-risk investment banking or casino banking.

Many seem to have lost interest in their primary job as well as in their responsibilities to the people they should be there to serve.

Roughly, it looks like some of them might get in trouble again.

The massive amounts of financial support should have been given to the banks only in exchange for an explicit promise to return to what they should be doing.

After all, the money used to bail out the banks was the taxpayer’s money, our money. British banks should be there to support people, businesses and the economy as a whole in this country.

Banking should be about savings and loans, not smoking and mirrors.

However, we must bear in mind that the current economic instability and difficult economic environment will inevitably lead to banks tightening their lending standards.

Their main priority tends to shift towards propping up their balance sheets and avoiding any suggestions that their finances are not entirely sound.

As we’re seeing now with Credit Suisse, any such proposal could lead to higher costs for insuring against default, which in turn could jeopardize its financial stability.

It could become a self-fulfilling prophecy that could have indirect consequences for the global financial system.

You know your business better than anyone else. A bank manager or accountant can look at the numbers. However, the statistics only go so far in giving an accurate picture of the health of the business and its future prospects.

It should be easier to borrow against real estate than against your inventory or future income.

Most lenders will be most comfortable offering loans secured against property or vehicles, which are easy for them to identify and value.

In their view, the amount of value they can achieve from a stock liquidation is less defined.

Property and vehicles are also, to a slightly lesser extent, likely to be available for acquisition should the business fail.

You should find that you will get the best interest rate available to borrow against this type of asset with more traditional loans. This is especially important right now, with interest rates rising rapidly.

In terms of alternative lenders, in my experience, the less traditional the means of financing, the more demanding the terms and the overall cost of borrowing. I will avoid this path in favor of continuing to be self-financed.

In general, net debt-to-EBITDA ratios of less than three are considered acceptable.

The lower the ratio, the more likely the company is to succeed in paying off its debts.

Percentages higher than 3 or 4 are considered “red flags”. However, 2 x your EBITDA as a multiple of the term debt should be acceptable to the bank without too much trouble.

I have a good friend Matthew who started with a handful of staff and a small amount of money and built his telecoms business into a company worth £1billion today.

It grew organically first and then expanded by buying smaller competitors and refinancing those companies to buy more.

Then in 2009, Matthew floated his company on the London Stock Exchange (AIM) Alternative Investment Market. You can go the same way in the future.

However, in the current climate, I would advise you to keep your borrowing to a minimum for now and take on as little debt as possible in the coming months, as debt-service costs will likely continue to rise until inflation is brought down. control.

I have seen many excellent and profitable companies go through cash flow problems and run up their loans and debts at the wrong time.

For now, I would recommend that you stick to your original business model, and grow your business naturally from profits wherever possible. It seems to have served you well so far.

Now is not the time in the economic cycle to expand excessively. Your existing borrowing facility seems like a reasonable approach to cash flow management.

Some of the advice I give to companies that want to expand is… If you were to walk away for ten years, which stock of your competition would you invest all your money in and why? This is something that you should watch and try to buy once the world returns to some form of normality.

There will definitely be easier times in the future when you can grow your business faster again.

For now, focus on the basics. Keep costs to a minimum and continue doing what you’ve been doing to get through the next crisis, without risking the explosive growth you’ve achieved so far. Good luck and God bless you.