How to negotiate a loan with your bank manager

Josh Sims brushes off his best suit, polishes his business figures and knocks on the bank manager’s door


Meeting the bank manager to discuss a loan? Wear a suit. And never cancel. “We all like to think the professional bank manager is concerned with the merits of your business, but people are people,” explains Phil McCabe, senior policy adviser to the Forum of Private Business. “So look the part – present in a professional way. That means both yourself and your business.”

But that’s a waste of time for any up-and-coming small or medium business? As Mr McCabe notes: “Admin does pay in the long run, but many business people feel that the time would be better spent out selling.” Besides which, nobody’s lending. Not so. While beliefs may have become polarised over recent years – SMEs (small and medium enterprises) say they can’t get a loan, banks say SMEs aren’t asking – the fact is that most applications are successful. According to the SME Finance Monitor, of 15,000 small and medium businesses (with up to 250 employees), 63 per cent of loan applications in 2010 were granted.

“Discouragement has been an issue. An SME assumes their bank will turn them down, rather than making an informal approach. Or the economy makes them want to batten down the hatches and not apply in the first place,” says Shiona Davies, director of market researchers BDRC Continental, who compiled the report. “But it does seem that more recent applications were more likely to be successful, although we can’t say whether banks may be more ready to lend or applications may be getting better.”

It’s the business owner’s job to make the bank manager look good

Certainly, while banks are more willing to lend the larger and more established the SME, 54 per cent of those making a first application for money got it, with 45 per cent of startups successful too. And better applications – expressing good governance and due diligence – have a lot to do with that. As David Ascott, corporate finance partner at chartered accountants Grant Thornton, puts it, to get the best finance package “an SME needs to market its proposition effectively. That means packaging the fundraising opportunity more professionally than it might have done in the past”.

“The best way to secure finance is a good credit rating – a track record of trade, records kept up to date, no cheques bouncing and the like,” says Mr McCabe. “Criticism of banks’ risk assessment criteria in these tighter times may well be justified but, putting yourself in their shoes, all banks want to do is to make a sound judgement about how their capital will be used and whether they will get their money back. It’s the business owner’s job to make the bank manager look good – he’s interested in looking good by backing winners. So show you’re a winner.”

The Forum of Private Business suggests key ways to do just this. To be credible is vital and that means preparing a convincing business plan with a strong, clear statement of objectives, which you genuinely believe in, “and other businesses meeting your manager won’t be clear on that, so it’s a way to get ahead of the game,” says Mr McCabe. Be transparent and provide maximum information, including figures, latest accounts, and a swat analysis of debtors and creditors and the industry at large. Be up-front about possible risks and worst-case scenarios. And back up your presentation with evidence of where your market is going, how you will reach it and the returns that will bring.

“We’ve seen a culture in banks of box-ticking rather than making real assessments of an individual business,” says Mr McCabe and, indeed, the Forum is pushing for bank managers to be given more local autonomy, better placed as they are to understand a local business. “But SMEs have to raise their game in terms of the information they provide. It’s about plugging a knowledge gap,” he says.

Some suggest it’s inevitably as much about selling yourself as having the right numbers. Glenn Collins, head of technical advisory for the Association of Chartered Certified Accountants, argues that it’s essential to ensure the bank manager is “clear about not just what you do, but who you are and how successful you have been”. But he also advises knowing what kind of finance you want in the first place and whether a loan might form part of a more suitable mix, perhaps including not just loans or overdrafts but, for example, lines of credit, equity investment or some form of asset-based lending.

In other words, be conscious of the fact that the bank is not the only option and be sure that the bank knows you have considered the bigger picture. After all, a spread bet not only minimises the bank’s risk, but if others have seen the potential in the SME, perhaps the bank should too.

“Planning ahead is important,” says Mr Ascott. “Kick off your discussions with prospective funders early, since in the fight for capital you need to be at the front of the queue. But just as importantly, explore alternatives – bring in healthy competition for funding and be open-minded to new institutions, new forms of finance and new structures to meet your needs. Don’t assume you can do everything on bank debt, like you could in the old days.”