Great news from Government and the big 4 Banks – ‘We want to solve funding problems and provide more business finance solutions now’.
On the surface this is fantastic news. However if we dig below the surface there is more to this than meets the eye. I would ask two questions:
- Do they really mean it?
- Do we really want it?
There are significant levels of political expediency here, telling us what we think we want to hear. I would make four points:
1. I believe the behaviours of the banks (and in fact many sectors) pre the global financial crisis was subtly encouraged and driven by political ambition. The government of the day was complicit in allowing a low touch regulatory environment as it was creating not only profits for the financial services sector as a whole, but also the businesses that were able to benefit from the easy access to finance, and the purchases they could make. All very artificial, but it did give the government great tax receipts and enabled them to spend this money in a way that (they thought) would make them popular with the electorate.
2. Post the crisis the banks have been told to simultaneously lend more business finance, reduce their balance sheets, de-risk and increase their share price such that the nation can get its money back. The current coalition government has George Osborne on the one side seeking to implement his turnaround strategy based on austerity. This of course is not popular (especially amongst the people on whom the previous government had showered their financial services-driven tax revenues). Mr Osborne is now saying to the banks generally, and RBS in particular (see our recent article), ‘cure these funding problems and provide more business finance to the SME’. On the other side of the coalition there is Vince Cable who has been consistent in his message of simply lending more business finance to all. In fact he now wants to tie the new RBS CEO’s package to the amount of money he can lend.
3. Notwithstanding the fact that Messrs Osborne and Cable come from opposite sides of the political spectrum, they are now both ‘saying’ the same thing. The banks must lend more. The intimation being that the banks must take more risks. Everyone knows this is ludicrous.
4. The desire to lend more business finance doesn’t make a bad credit good. The fact that it is what many want to hear doesn’t make it right. In our ultimate democracy, made ever more so with the effect of Social Media, politicians have a very small window of opportunity to get their message across and in a period of adjustment from our previous excess, they realise that nobody likes bad news.
The very clear (non-political) message is quite simply that banks want to provide business finance to well-structured businesses, that are prudently managed and ideally have growth potential. They don’t have to be making super profits right now, simply have a plan that will create value for all, including the funder who is being asked to provide the cash to make the whole thing work.
Managing expectations of Banks:
In the lead up to the financial crisis the behaviours of the banks was so bad that the more creative borrowers could get virtually anything financed. These actions filtered down both internally and externally to create a situation where we had all come to believe that the Banks were national institutions that were mandated to lend money whatever the proposition. It now comes hard that they (the banks) are a good deal more circumspect in who and what they will lend to.
In my opinion this is not a bad thing. We don’t want our banks lending money at the drop of a hat into badly structured and/or highly speculative business opportunities, particularly when it is us, the taxpayer that picks up the tab when it goes wrong.
Funding requests need careful consideration. The potential funders need to be first identified and then approached in a structured way.
Finding alternative funding
If the continuing lack of availability of funding is affecting your business, please contact us. We are specialists in this field and can hopefully point you in the right direction.
As always, if you have any comments or any of your own experience you would like to share on this subject, please contact me at firstname.lastname@example.org or on 0845 689 8750.
Image by: CL Group