The recession has officially passed, but retailers are still struggling to get loans approved. Amy Lanning investigates
The bank isn’t the only option for obtaining funds. Peter Williams, managing director of finance broker The Oxford Funding Co, urges retailers to think outside the box:
- First, look at your own assets to see if you can’t sell, cash in, or liquidate something to raise cash.
- Second, ask Granny. Family members are getting no interest on their savings and it’s definitely worth asking friends and family.
- Finally, if you do need to get a loan, then try a broker. They have access to alternative types of finance and may be able to think of some way to do it. Registered brokers never charge clients a fee, so there’s no harm in asking. You can contact the National Association of Commercial Finance Brokers on 01392 440040, or email firstname.lastname@example.org
When times are tough it’s imperative your business is as strong as it can be, and so continued investment can be vital. But that’s easier said than done if your bank manager is refusing to provide funding to help you make all-important adjustments.
A recent survey by the Forum of Private Business revealed that most lending cuts have been to overdrafts, with some businesses reporting reductions of more than 50%, and even outright cancellations to their overdraft facilities. The biggest individual reductions, meanwhile, were from rejected loan applications and the withdrawal of credit by factorers.
Steve Bassett, who runs three Londis stores in Weymouth, Dorset, has been prevented from buying another store because he’s not been able to get a sensible deal on a loan. “The bank wanted 5% above base,” he reveals. “It’s do-able now, but what if interest rates go up? I didn’t go for that because I was scared. It’s the uncertainty I could go out and borrow, but I’m not prepared to expose myself that much. I’m not risk averse, however managing that risk is a factor.”
Budgens retailer Jonathan James, who owns Budgens and Spar stores in Cambridgeshire, felt forced to take a risk in order to get a loan agreed. “My bank made me hedge 75% of the amount that I borrowed to buy my Dersingham store,” he says. “Shortly after taking it out, recession hit. My hedging costs me thousands a year on today’s market and I had to take it over a five-year period. In short, this loan is costing me loads more to borrow than it would have done if I had not been forced to hedge.”
Meanwhile, Dave Phillips, who runs four Spar stores in Pontypool, Gwent, is still waiting for a £40,000 loan to fund half the cost of a store refurbishment. “We ran into some problems with one store when a Tesco opened nearby,” explains Dave. “That crippled us and to add insult to injury the post office opposite closed, which had brought us footfall. We had to consider whether to sell the shop, close it or put the post office in, and we decided to apply for the post office. We sat down with the business manager in March this year and the loan still hasn’t gone through. It’s been a nightmare.
“Despite borrowing only £40,000, the best deal the bank could offer was 8% above the base rate and many hoops to jump through. I could get a personal loan with less hassle. The payment terms aren’t good, either. I can only pay off so much per year and if I want to pay back early I still have to pay the full amount of interest that would have been accrued over the full five years of the loan. If it was a personal loan I could pay it off early and only pay the interest up to that point.”
Questions you need to be able to answer:
- Where there is an expectation of an uplift in the trading figures, what are the assumptions behind these and what capital expenditure is necessary to get to this point?
- What is the breakeven point for the business with the proposed debt level, ie the margin of safety built in to the forecasts?
- What will be the impact of a potential increase in the cost of funds?
The refurbishment was completed in July, but the loan still hasn’t come through. “I’ve got shopfitters breathing down my neck because I’ve not yet paid them,” says Dave. “It’s lucky I know them personally so I’ve got some leeway, but they are at the end of their tether. I have now asked to see my business manager’s boss because I’m not happy with the way I’ve been treated. The interest rate is ridiculous, the charges I have to pay are ridiculous, and my business is being crippled.
“Before the recession you wouldn’t have had to put your shop up as collateral, but now you have to. One of the absolute gems was the bank insisting we take legal advice at the cost of £200 to be told that if we put our shop up as collateral and go bust, we would lose the freehold. We are not idiots. We understand that!”
Saqib Ghafoor, who runs a Nisa store in Gateshead, Tyne & Wear, had his loan application with NatWest rejected and was forced to employ a broker to guarantee that a second application with Barclays would be approved. He’d already bought a second property in December last year but needed to refurbish it. “I had to go to a third party, which was more costly but at least it was guaranteed that I would get the money because it was a very urgent situation,” reveals Saqib. “We were waiting on the money to get the store up to scratch.”
Baz Patel successfully applied for a couple of loans in January and February last year, but has been struggling since, despite an impeccable 11-year history with the bank. This year he was refused a loan from HSBC for 50% of the cost to refit his store and was knocked back for a business credit card that the bank had initially invited him to apply for.
“HSBC said they were not looking to loan any money to small businesses,” says Baz. “My business manager said that he knew I had a good business, but that was their policy now. This is the time when businesses should be gearing up to make sure we’re good for the future, but I had to put some of my plans on hold. I will still invest my bit of the money but some of the work won’t get done. Trade will pick up again in a couple of years so we need to be ready.”
If you are looking to buy a new store:
- Bring with you a detailed CV of experience both in respect of the individual and the business being acquired
- Ideally, invite your lender to the site that you are looking to finance, and ensure that you properly know your market
- Consider the effect of competition and ensure you have an accurate knowledge of any forthcoming planning applications that may affect your business
- Be prepared for an honest and forthright debate with your proposed lender and keep your options open!
Like many retailers, Dave Phillips says there’s no goodwill between the banks and small businesses anymore. “You used to be able go to the bank manager and sit down with a cup of tea and talk to him. If you were having problems, like we had with one store after Tesco opened, you could ask for help and get some money with no problems. Now it’s typed into a computer and what comes out comes out and the bank can’t deviate from that.
“The personalisation has to come back into it. Computers can do so much for you, but they can’t decide on personal circumstances. If you have a short-term problem you should be able to explain that. A couple of times we went overdrawn but for no longer than 24 hours and that affected our rating. They said it had dropped considerably. In the following three months we had no problems so our rating should have gone up, but it doesn’t go up as quickly as it comes down.
“HSBC is a good bank it’s survived the recession without borrowing money but if you look at its charges you can understand why it’s not had to borrow money. Last year I borrowed £140,000 to open up a new shop on a forecourt. The set-up fees alone were £3,500, and they didn’t tell me upfront about them either.”
Saqib believes the situation will only get worse next year. “There’s a lot of press about the banks saying they are approving more loans, but I don’t think they are, and it looks like it will get worse. The banks want you to go into much more detail when you apply for a loan and then they’re only approving the minimum. It’s still the same as when we were in recession.”
Steve, meanwhile, would like to see a change in structure to interest rates. “We need some sort of stepped or tiered interest rates,” he says. “For example, you may be happy to pay 5% above base rate now, but if the base rate goes up to 5%, you pay 7.5% instead of 10%.”
There could be some light at the end of the tunnel, though. The British Bankers Association Taskforce last month laid out 17 commitments in a bid to open up communication channels with the business community. The commitment to publish a regular independent survey on the amount that is being loaned to small businesses should help to end the confusion on lending levels, and communication channels will be strengthened with new lending principles and a transparent appeals process.
Mike Wright, director, business & commercial banking (South West Hertfordshire) for Royal Bank of Scotland, explains how to give yourself the best possible chance of having a loan accepted.
Provide a plan that forecasts the cash flow requirements of the business, including the worst case scenario. Too often people are not honest enough for fear of rejection, but you need to take a pragmatic approach
Usually the bank will want to see an up-to-date statement as to how the business is performing on at least a quarterly basis, but larger operators should be looking to produce this information on a monthly basis. As a minimum you should be able to produce a profit- and-loss statement and a balance sheet and reconcile this back to your original projections
Forecasts should always be professionally prepared if you do them yourself have your accountant look at them before you present them to the bank. Make sure that they are integrated, i.e. that the profit and loss forecast, cash flow forecast and balance sheet all work together, and any change in the profit and loss forecast is automatically reflected in the other financial data. And make sure that you understand the forecasts and the basis upon which they have been produced.