While many experts have declared the global financial crisis (GFC) over, SMEs are still experiencing a credit crunch.

The relationships between banks and SMEs has been damaged during the crisis.  Whilst banks need to take a more prudent approach to lending in the current economic environment, banks should understand equally that businesses have struggled with the tighter lending conditions, and therefore banks need to improve their transparency and communication on changes in their lending conditions, including providing earlier notice of such changes.

Giving business greater notice of changes to lending conditions will help them amend their practices to meet the new requirements.

The other main observations from the CPA SME recent round table discussions are presented below:

• The banks are still lending, but it seems that secured lending is nearly the only form of new lending that banks are willing to offer.

The GFC has caused lenders to review their credit portfolios and seek increased levels of security to support financings.

For existing loans, many borrowers have been required to provide additional security and, for new loans, security is essential.

With many asset values declining during the GFC, and anecdotal evidence suggesting that the banks have decreased their loan to value ratios (LVR), such measures may be indirectly impacting on cash flow.

Small businesses are required to use personal assets to secure loans, and with the decreasing value of some of these assets, the banks are now saying that the business has to reduce the level of debt to meet decreasing LVR and asset valuations, and this is having a major impact on cash flows of small business.

Many businesses have been required to support the additional security with personal and director guarantees (which had previously not always been necessary) and, in some cases, key man insurance.  This type of insurance can be quite expensive.

In addition, the type of security the banks are willing to accept has changed; goodwill, cash flow and profitability lending appear to be no longer available – lenders are looking for tangible assets to support finance facilities.

The upshot of these additional security requirements is that many businesses are now handing over all of their available security to their bank, which in turn may limit their ability to switch banks and diversify banking arrangements.

• Banks require more information from businesses that want new loans, and require extra reporting from those with existing loans.

The overwhelming observation was that with an increase in the perceived risk, the banks are supplementing the level of security with requests for more detailed financial information than ever before.  Many can question the usefulness of much of this additional information to the banks and to the businesses concerned.

Also sometimes the provision of additional information can, in some instances, be very costly to business.

Steven Miinchenberg, chief executive officer of the Australian Bankers’ Association (ABA) provided this comment about the banks’ additional information requests; 

“Banks have told the ABA that they may seek more information from small businesses which is appropriate when economic conditions are uncertain or trading conditions change which affects small business performance.  This is an appropriate request from banks given they must continue to lend responsibly and prudently.” 

Perhaps banks are now doing what they should have always been doing.  They are now reviewing the information that you have been casually giving them over the past few years; you cannot begrudge them that.

What becomes critical under current circumstances is how the information is prepared and presented to the bank. 

Presentation is everything.  You have to have cash flow forecasts, figures, everything that is in a good light – the more paperwork the better.  They even want to see photos, pictures – really the best presentation they can get.  If you are lacking on anything to do with figures or forecasts, you have no chance.  Even though they are taking on a larger portion of security, they still want to see forecasts because they would much rather see you pay back the loan than foreclose. 

• There are concerns that some business bankers lack experience and authority, and concerns about bank staff turnover. 

Strong views were expressed that the business bankers they deal with are inexperienced and therefore unlikely to have the necessary skills to appropriately assess credit applications.  This adds to the burden on SMEs in securing finance and maintaining finance facilities, as they are having to spend extra time providing additional explanations and information about their industry and business which an experienced banker may not normally require. 

In addition the turnover in business bankers is adding to this burden, as this often creates a need to constantly re-explain their business to new bankers. 

• Competition among lenders has reduced. 

Some stated that the root cause of banks increasing the requirements they place on SME clients is the lack of competition within the Australian banking system.  With the near non-existence of a foreign bank presence and the mergers of some of the second-tier banks with the major four, the result, as far as many members are concerned, is a shift of power to the banks. 

Finance brokers have also been affected by the lack of finance alternatives and this raised the question as to whether SMEs have the ability, given these circumstances, to optimize their financing arrangements. 

Tighter conditions and more expensive finance are restricting business growth. 

The tighter credit conditions have created numerous challenges for SMEs.  One of the most evident has been the increase in the cost of funding.  It is more expensive to borrow in the low interest rate environment than it was two years ago when rates were higher.  The margins are higher; the fees have increased, even with more reporting and increased security. 

This has created the need for many businesses to look for alternative forms of finance, such as optimizing working capital and increasing equity injections. 

As a result of stricter loan conditions, many successful businesses are being restricted in their ability to expand the business or finance an acquisition. 

This could possibly have the effect of hindering the recovery process.

Conclusion

It appears from all the evidence that the lending environment that many SMEs are now experiencing has become the new normal, and therefore businesses will need to improve their financial management to ensure that they have strong business models in place that will free up cash flow and provide solid financial performance in order to satisfy the new criteria for lending to the SME market. 

As the ABA states, “Your business needs to make a profit; so does a bank.  When you approach a bank for a loan, you are asking them to go into business with you”.

At Advantage One we have the skills and contacts within to help any ongoing business get a better deal.  Call us to discuss.

Tony Martin

Director