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Should growing SME expect banks to share risk?

7 March 2019

LBV Member, Dafydd Prichard, was frustrated by his bank’s insistence on Personal Guarantees from each company Director despite his business’ impeccable twenty-year trading history. In this article, Dafydd questions whether the risk-averse attitude of banks stymies the goals of our region’s entrepreneurs.

When my partner and I started our business twenty years ago, one of the first decisions we needed to make was who to bank with. Although some new players were nudging into the SME market, most new businesses were still being advised by their accountants to choose one of the big four (which at the time still even included Midlands).

Eventually, we made our choice based on very simple criteria; who had the lowest fees in the first 12 months? And who had the nearest branch and the shortest lunchtime queues? Back then, over 90% of clients paid us by cheque and online banking wasn’t even a consideration. I’m not going to name the bank we chose as I think the point I’m making applies across the board, so for the purpose of this article let’s just call them, Our Bank.

As our business ambitions grew, so did our financial requirements and sometime around 2005 we approached Our Bank for an overdraft facility to help manage cash flow. As was the convention, this required Personal Guarantees from the Directors as well as a debenture over the company. A couple of years later, along came the banking crisis and when it was the time to renew our facility, we were reminded in stern tones how Our Bank was strong, stable and supportive of small businesses…

Roll forward to 2019, and we ’re substantially bigger .  Naturally, as a mature and responsible business, we pay particular attention to record-keeping and we’re proud of our first-class (or so Our Bank tells us) credit rating.

Financially, we still require the same overdraft facility from time to time, but crucially, our deposit account’s balance regularly stands at six figures. Cue the great paradox: Our Bank is only required to guarantees approximately 50% of the money we entrust to them (the first £80,000 of savings in the event of a crisis) whereas even twenty years on, my business partner and I must provide a full Personal Guarantee for the amount we borrow from them. This is on a joint and several liability basis and even applies for very the very smallest overdrafts (as little as £10,000). This niggles on principle and I believe, actively stifles growth.

I recently challenged my Relationship Manager on this point. I felt that it was time for Our Bank to share the risk. I suggested that if we are simultaneously lending the bank five times the amount we are borrowing, then shouldn’t we also be sharing equity in the risk?

Well, not according to my Relationship Manager or his Regional Director. Apparently, their hands are tied. Not their fault — it’s the bank’s Policy Framework that prevents flex. Essentially, The Computer Says No.

So that’s that then. No to twenty years of loyalty. No to a company with an impeccable credit record. No to a company that’s been prepared to borrow to grow. No to a company that’s operating in the thick of the technology sector and that exports globally.

Importantly, our growth has been sustained over many years and our profit margins are very healthy, so in terms of growth, the risk we present is extremely low indeed.

Banks love to shout about their support for local business, but their risk aversion is stifling growth. Our ambition is to grow – to create jobs, wealth and a legacy.

To reach their full potential, SME owners should not be setting commercial goals and ambitions with an eye on personal risk and exposure. This can only change if banking and other financial/funding institutions are prepared to change their position – to go all in and back the company and the leadership team.

What’s particularly irksome perhaps, is that the technology exists today to mitigate much of the risk that the banks might face. Fintech and Risk Management companies are extremely capable of using Artificial Intelligence and Profiling technologies to quantify risk.

The term ‘skin in the game’ is bandied around with much bravado. Etymologically, it appears, it has two possible origins: attributed to Warren Buffett, referring to his own investment in his initial fund; and of course to Shakespeare’s evil money-lender, Shylock, and his demand for a pound of flesh from poor Antonio. I’ll leave you to decide which would be preferable in the context of the UK’s SME landscape.

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