BDRC presentation. SME Discouragement

SME Discouragement

18th December 2013

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Introduction

These charts summarise the results of 25 qualitative interviews conducted with SMEs that had taken part in the SME Finance Monitor in 2013. In their Monitor interview they indicated that they had been “discouraged” from applying for finance, either directly or indirectly.

These charts cover three key themes:

The causes of discouragement1

The impact of discouragement on SMEs2

How such SMEs might be encouraged to apply for finance in future3


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Methodology

25 depth interviews were conducted. A mixture of face to face and telephone conversations with the main financial decision maker who had taken part in the SME Finance Monitor interview

Quotas were set by number of employees and type of discouragement (direct v indirect and loans v overdrafts):

• 7 interviews with 0 employee SMEs, 8 with 1-9 employees and 10 with 10-249 employees

• 17 discouraged for an overdraft, 8 for a loan (on the Monitor)

Across the interviews there was a spread by sector, region, external risk rating, ethnicity and gender of owner

• 7 had a worse than average external risk rating, 14 and average/low rating and 4 did not have a rating

File location/File Name (including version)/Author/Date

The causes of discouragement


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Discouragement has a decline at its heart

All discouragement stems from a decline of some sort

by the bank

If it was recent = direct discouragement

If it was a while ago = indirect discouragement

No evidence in these interviews of discouragement

having nothing to do with a bank


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The basis of current discouragement was almost always a refusal to lend in the past, reinforced by subsequent experience

Past experience

All the SMEs had experience (sometimes several years ago) of an unsuccessful attempt to secure finance from the bank – either a formal application, or asking the bank for short-term flexibility (such as paying wages when a supplier cheque was delayed)

The way the decline was handled

There was a wide range of examples of the decline being badly handled (the computer says no), which made this a bruising experience and not one the respondents wanted to go through again if they could avoid it

The general attitude of banks to SMEs

If day to day the bank gives the impression that the SME is not important to them (individually or as a sector), with niggles, mistakes and lack of contact, then this reinforces a perception that the bank is not interested and so will not want to lend


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A badly handled decline can have long term repercussions

Applying for finance is a big deal Involves making an appointment and is a test of their business and its potential

They expect to get a fair hearing And that the bank will advise them on

the best way forward

But the reality is often different A very quick decline, the computer says no, we don’t do that sort of deal. Little evidence of suggestions for what to do

next, or how to do better in future

So not keen to go through that again It’s been stressful, embarrassing and time consuming, so why do it again?


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For smaller SMEs the issue is compounded by a lack of credit history and financial sophistication and can lead to them being “trapped”

Credit history and track record

New businesses, and smaller ones, found it harder to access finance – they lacked a credit history, and many did not have business plans or management accounts to support their case. In some instances it was clear why the bank had declined to finance them

A lack of sophistication

Very few of these respondents had specialist financial knowledge, or accessed specialist advice. This meant they might not present their case to the bank in the right way, at the best time, or for the most appropriate form of finance, and lacked confidence when they did speak to the bank

A “vicious circle”

In several instances an overdraft had been refused. As a result, the account went overdrawn incurring charges – this both increased the overdraft and made their credit history worse, thus making it less likely they would be successful with a future application


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Larger SMEs typically had a more defined need and felt worthy of bank support. The bank relationship was damaged by the decline

Credit history and track record

Larger businesses were more confident - feeling that they have demonstrated to the bank that they are a ‘good bet’ because the account had been run well and they had never caused the bank any problems. Finance here was more likely to relate to expansion or development plans

A “one size fits all” approach

Larger SMEs were more likely to feel that the bank had not treated them as an individual business, and instead had taken a view about a particular sector. They feel the local manager has no authority to make their case

Remote decision making

Many reported that the decision was made remotely, did not truly reflect their circumstances, and as a result the relationship with the bank was damaged and they felt that they couldn’t trust them


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External influences reinforced but did not create discouragement

PeersMost had tales of other businesses locally that had not been able to get funding from the bank, but these experiences reinforced their views of the bank rather than creating them

Media There were some general comments to the effect of “well, banks aren’t lending are they” but no specific sources were cited

Lack of external awareness

The focus is on running the business day to day. At the smaller end in particular they do not have time to review options or spend time thinking about things that do not relate directly to that day’s challenges


The impact of discouragement


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Most SMEs are “managing without” with varying degrees of success, while there has been a marked impact on the bank relationship

Cutting cloth accordingly

Some have postponed / cut back on plans so are doing OK but at a slower pace. Others have juggled supplier and other payments and are managing but it takes time and effort to keep everything ticking along. Some have ended up in the “vicious circle” described earlier and can’t see how they will escape

Other fundsThere were some instances where the owner had put in their own money, or borrowed it from family and friends. Others were using asset finance (generally seen as a positive experience)

The bank relationship

None had switched – there was a general perception that the experience would not be different elsewhere – although that might change if circumstances improve. There is though a view that the bank had “had it’s chance” and having failed the business once, would not be considered again


Overcoming discouragement


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For these SMEs the stronger evidence points to banks not lending to businesses like theirs

Bank willing to lend

Bank not willing to lend

Experience of others

Day to day experience

The way it was declined

Previous decline

Bank messages?

RM?


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So there are a number of barriers to considering the bank in future

Bank finance not required They are planning and running

the business without it

Other sources accessed Asset finance, own funds, family,

trading off suppliers etc

The Bank said no And I have seen nothing since to

make me change my mind

Day to day service issues Niggles, and frustrations to make

you feel the bank doesn’t care

Lack of support or advice The bank only contacts you when they want to sell you something

Unaware of support initiatives Low awareness of FLS, mentors,

appeals etc

Experience of peers / media Aware of others struggling to get

finance

I wouldn’t try the banks again unless it was the last extreme. It’s the fact that you have to go and plead your case. It’s not a nice thing to have to do – it’s like they are doing you a massive favour


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Changing current perceptions is not going to be easy

Views held for a long

time

There are a range of ways in which SMEs

have felt discouraged

The wider banking

relationship also needs to

improve

Unless SMEs feel their bank is interested in them as a customer, they are unlikely to feel the bank will be interested in lending

to them

There is a role for a “trusted voice”

SMEs were suspicious of the success rates quoted to them, and were unaware of the sources of help and support available to

them. They see business groups and other bodies as a way of communicating with

them

Discouragement had a number of causes and will not be overcome quickly, with a number of factors at play:

And what is the “new normal”?

The recovery is still new, SMEs are unsure

what the general economic climate is, whether banks are

lending and what the new lending ‘rules’ might be. But little indication they are

waiting for the banks to start lending again


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For further information

+44 (0) 20 7490 9124

+44 (0) 7507 216574

[email protected]

Shiona DaviesDirector

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BDRC presentation. SME Discouragement

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