Partner Article

Adjusting to the new normal: bank lending

Rob Donaldson, Head of M&A at Baker Tilley looks at current state of play in bank lending to SMEs.

While headlines declare that a lack of bank lending to SMEs is harming the economic recovery in the UK, perhaps following the recent economic turmoil, the UK corporate community is learning to accept that the caution in the lending practices of the banking community is here to stay. Rather than hoping for something to change, UK Plc has moved on.

On-going challenging economic conditions have forced businesses to re-evaluate their business strategies and practices. This may mean investigating new technologies and looking for opportunities to take advantage of failing competitors. It does not, necessarily, require cash.

We recently carried out our annual Outlook survey with owner-managed businesses and only a fifth of the 600 responses indicated that they were planning to raise finance in 2012, and less than half of those businesses planned on using traditional bank lending. This indicates that businesses are relying less on debt based finance and finding another way.

Our sense of things is certainly that lending is much less aggressive than in the boom but then, of course it is, and of course it should be. We do not want banks to return to the practices of 2007. Leverage availability should be lower because banks previously lent too much and costs such as margins and arrangement fees will be higher than before because debt was too cheap in the boom.

We also think it is a question of demand. According to our 2012 Outlook survey, 83% of the respondents reported that their needs are being met by their bank. But with so few looking to raise traditional bank lending, this begs the question, what needs? For example, we have many clients with no debt; cash in the bank and little intention of spending it or investing aggressively. Growth capital can be found for those business who want to raise finance but, in the current climate, they must prepare properly and be selective as to who they approach as providers of debt and other forms of funding.

This was posted in Bdaily's Members' News section by Tom Keighley .