Raising a Bank
Boots Professor of Accounting & Finance
Nottingham University Business School
Today I’m going to….
1. Talk you through the activities of one small
company over the last couple of years,
emphasising their response to rejection of a loan
2. Look at Project Merlin and the most recent
evidence on the availability of bank finance.
3. Look at how you can improve the probability of a
loan application being successful.
The case study company.
1. A small business consultancy.
2. Clients are typically large plcs including some
3. Turnover typically measured in tens of millions of
4. There are generally relatively few clients/projects at
any one time.
5. Finding the next client/project is a constant
The financial problem …
1. 2008/2009 saw the company facing a potential
2. An approach to their bank (a long-standing
business relationship) had not been successful.
3. Maybe it was a bad proposal, or maybe the bank
wasn’t really open for business.
4. Thankfully the impending cash crisis was several
5. Still time to put a survival plan into operation.
The financial solution …
1. More attention given to cash flow forecasting.
2. This highlighted the need for discussions with
suppliers about payment terms.
3. It also highlighted the importance of staff salaries:
i. High fixed cost.
ii. Bonus element limited to staff involved in marketing.
iii. Annual bonus “no more than a Christmas present”.
4. Actions taken:
i. Recruitment freeze.
ii. Underperforming staff “let go”.
iii. Everyone shifted to a low fixed, high variable salary system.
5. Easy? No! Necessary? Yes!
Now some external
1. A new application for external finance was
2. “Who has an interest in keeping us in business?”
3. Successful bid to a non-bank source of finance.
4. A professional bid from a company anticipating,
not reacting, and one which had already put its
own house in order.
Life goes on …
1. Marketing efforts were not reduced.
2. Staff knowledge and skill updating were not cut
3. 2010/2011 new projects, but new problems:
ii. Impending cash flow problems if expansion goes ahead.
iii. Existing clients are altering payment terms.
4. The decision has been taken to “Expand!”
5. The company’s bank is now keen to help. Why
not? The problem is timing of cash flow, not the
existence of cash flow. Low risk lending.
Banks change their tune ...
1. “It used to be the case that if it was a good
business proposal we would lend against it. Now if
we can lend against it, it is a good business
2. The run up to 2007 involved a (bonus driven?)
acceptance of risk by banks.
3. Now banks are very risk averse.
4. I’ve recently heard of banks, acting as purchasers
of services, opting for high fixed price contracts
rather than variable price contracts with a good
probability of coming in cheaper.
Is bank finance currently
1. Barclays TV advert. “80% of loan applications from
small businesses are successful.”
2. A source “close to” Business Secretary Vince
Cable: “What bothers him, on a very regular basis,
is that when he is going round the country, he
keeps getting the same complaint – that the cost
of loans is too onerous, which puts businesses off
even trying to borrow.”
3. Is that what is happening? Only the few good
proposals that can cope with the high rates of
interest charged by banks are being put forward.
The government has a
1. The government thinks the problem is not a lack of
demand for bank finance, but a shortfall in supply.
Risk averse bankers don’t want to lend.
2. The government has a solution: “Merlin’s our
mainstay and Witchcraft is the name of the
product.” (A slight misquote from Oliver Lacon,
Cabinet Office in John le Carré “Tinker Tailor Soldier
3. OK. I’m being flippant, but Merlin is the basis of
government’s attempt to bring banks and SME
loan applicants together.
1. HSBC, Barclays, RBS, and Lloyds (with a bit of help from
Santander) have agreed to make £190 billion of credit
available to businesses in 2011 (compared to the £179
billion lent in 2010).
2. Of this, £76 billion will be made available to small
businesses (compared to the £66 billion lent in 2010).
3. These levels form part of the performance targets that
banks’ Chief Executives must achieve to earn their
4. Merlin also requires the banks to control bonuses and
become more transparent. Santander opted out of this
Merlin to date …
1. The Bank of England is charged with monitoring the
agreement and with publishing quarterly
assessments – the first of which was published last
2. In 2011Q1bank lending to small firms was £16.8
billion rather than the £19 billion promised.
3. The overall lending target was very nearly
reached, £47.3 billion rather than the £47.5 billion
4. Is the glass half full (only a partial quarter) or half
empty (a gross rather than a net figure)?
Is it supply or is it
1. A recent Federation of Small Business survey says
that 44% of its members who approached a bank
for credit were refused. But the survey also says
that only 16% of members had approached a
2. Another survey by the EEFederation says that the
availability of bank financing has improved but
that the cost of credit has also increased.
3. Quantity up and price up is possible. The banks are
pricing in a higher risk of default ….for everyone!
How to proceed …
1. Don’t rely on Merlin. The agreement is for one year
only, and it stipulates that loans will be made on
commercial terms and be subject to demand.
2. Don’t sit around and wait for the money to arrive,
put your house in order and apply.
3. A tidy house requires:
i. Financial planning with a heavy emphasis on cash flow forecasting
ii. Evidence that existing operations have been revised with cash flow
iii. A strong loan case.
What do banks look for?
1. Person/purpose. 1. Character.
2. Amount. 2. Ability.
3. Repayment. 3. Margin.
4. Security. 4. Purpose.
5. Expediency. 5. Amount.
6. Remuneration. 6. Repayment.
7. Services 7. Insurance.
Key points …
1. It is clear that people and project are both
important in the loan application process.
2. It is clear that the bank wants reassurance about
cash flow stability and marketability of assets.
3. It is clear that the circumstances of the bank are
relevant to the success of any application.
4. You can maximise the chance of success, but you
can’t guarantee success.
The components of a loan
1. There are two sides in a negotiation.
2. You must provide:
i. Evidence of a competent management team (Personal)
ii. Evidence of past financial performance (History).
iii. Project data (Project).
3. The bank lending officer (BLO) brings along:
1. Experience and seniority.
2. A job description.
4. A senior BLO ranks like this: Personal =1, History = 2,
and Project = 3. A junior BLO ranks like this: History =
1, Project = 2, and Personal = 3.
5. The job description might not give the right to say
“Yes.” Someone more senior might be needed.
What about the numbers?
i. Forecasts and assumptions relating to the project proposal.
ii. Audited accounts for the last 3 to 5 years.
iii. Information to bring the audited accounts up to date.
2. Be prepared to discuss as well as deliver the
material. You need to be ready to cope with
“What if?” The obvious “what ifs” should have
been dealt with in the documentation.
3. Be prepared for site visits in some circumstances.
4. Don’t expect the BLO to do your work for you.
It is all about risk…
1. At the most basic we are talking about cash flow
variability against a fixed interest charge and
marketability of assets if things go wrong.
2. Think about the sources of risk, and what the bank
will be comfortable with.
3. For example, a mineral extraction proposal consists
of “existence” risk, “extraction” risk, and “market”
4. Think back to the case company. “I’m not sure
exactly when the cash will come in.” is a very
different statement to “I’m not sure whether the
cash will come in.”
Don’t be too optimistic …
1. Most systems are capable of generating extreme
2. Past fixes deal only with particular causes.
3. Ask how you would cope with the most extreme
event you have already experienced.
4. Then remember that the worst thing that has
happened isn’t the worst thing that can happen.
5. At the moment, there is a big difference between
your company and a bank. You accept the
inevitability of risk while a bank tries to avoid it.
Questions please …