Recent statistics from the Federation of Small Businesses show that four in 10 firms which applied for finance were refused despite confidence in the sector being at its highest level in three years. This has prompted a call for a clear plan for the much talked-about new Business Bank which is expected to encourage a stronger focus on the needs of small businesses in the banking sector.
However, in the absence of the new Business Bank it is of deep concern that despite the clear mandate to provide access to finance to British business that is being given to our existing financial institutions this is not translating into more than a 25 per cent success rate in finance applications.
The reality is that small businesses cannot afford to wait for the banking environment to change to a more SME friendly lending environment. They need growth capital and they need it now. Both bankers and investors look more favourably on a company that has a finance director as part of its management team as a finance director can act as a liaison between entrepreneur and banker since he or she speaks both “entrepreneur” and “financial” languages.
A finance director is a small business’s most important strategic hire as their ability to present the financial projections of a business in financial language breaks down communication barriers between banker and business owner. What we have seen time and again is small businesses struggling to get access to finance not always because the use of capital is flawed but because the financial planning and what if scenarios have not been fully thought through or not presented to the bankers in a way that shows they have considered all the risks. Bankers are by nature risk averse and if they feel there is someone on the team who is on top of the risks they are much more comfortable with offering debt. Equally investors need to feel their equity stake is being looked after by someone who is very experienced at finding the right solutions to make the money go further. In real terms what this means for a small business is that hiring a high quality finance director can be the difference between success and failure of a funding application.
The key is that a finance director works with a business to determine how much capital is required, how this money should be spent and forecasts future growth and cashflow. If the company needs debt the finance director will use scenario analysis to reassure the bank that the interest payments will be covered. A part time finance director brings a wealth of experience from multiple companies with him or her. He or she is someone you can ask – has this worked for you before – what did you do the last time that happened – and there will be an answer for you. This makes nervous investors much more comfortable.
It is no surprise that entrepreneurs are, in the main, unaware both of the benefits of a finance director and the availability of the part time solution but it is puzzling that banks are not more actively encouraging potential borrowers to opt for this strategic hire. It is the lack of financial expertise held within small businesses that prevents banks from extending debt rather than a lack of appetite to lend. Adding a finance director to the management team solves that problem.
Banks need to become serious about helping their customers to grow their businesses. They need to make their customers aware of the value that a part time finance director can add to a business. The larger a business becomes the more services it needs from the bank so the more small businesses in a bank’s portfolio on a growth trajectory the healthier the banks own balance sheet will look.
In order to really solve problem of contracting access to finance with its attendant impact on economic growth banks must start to encourage entrepreneurs to use finance directors to de-risk their business proposals. While we are waiting for the Government’s new Business Bank to come online we still need to see an improvement in the success rate of applications and entrepreneurs need to be aware that hiring or not hiring a finance director can be the difference between success or failure of a funding application.
Chris Chapman
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