Bank finance in the credit crunch

Despite talk that lending terms are tightening and cash is harder to come by, banks insist that their doors are as open as ever to growing companies. We talk to banks, financial advisers and accountants to find out what’s really going on.

Despite talk that lending terms are tightening and cash is harder to come by, banks insist that their doors are as open as ever to growing companies. We talk to banks, financial advisers and accountants to find out what’s really going on.

In the current environment, it seems reasonable to expect that growing businesses might struggle more than usual to raise finance. But listen to the banks and the story is relentlessly upbeat.

John Davies, marketing director of Barclays Local Business, comments: ‘In a world where it’s becoming more challenging to find money, we see ourselves as very fortunate because we are still in a position where we are keen to grow our lending book at all levels, both large secured and smaller unsecured loans.’

Other banks take a similar line – which perhaps shouldn’t be too surprising. And of course they have a point: no-one is suggesting funding has dried up altogether. A consortium of lenders, led by Royal Bank of Scotland (RBS), recently put together a revolving debt facility of £150 million for FTSE 250 insurance group Brit Insurance and private equity firm Investcorp raised $243 million (£122 million) from 15 banks, principally in Europe, Japan and the US.

But finding a seven-figure sum for a growing business could be a different matter. Anecdotal evidence, at any rate, suggests that lenders are clutching their purse strings just a little tighter.

Steve Currie, a partner at Catalyst Corporate Finance, puts some figures on this perception. ‘The market’s still changing day by day,’ he says (speaking in late April). ‘One month ago raising £50 million or £60 million of debt was relatively straightforward: two banks would club together and put in half each. Today, banks are looking to hold maybe up to £15 million, so two banks can put up £30 million, but getting £60 million is going to be a lot harder.’

As far as mergers and acquisitions (M&A) are concerned, there’s little doubt that less money is being raised. Even with the stimulus of an imminent rise in capital gains tax, the first quarter of this year saw the total value of M&A deals in the UK fall 37 per cent to £11.8 billion compared to the same period of 2007, according to research from Baird, an investment bank.

At the smaller end of the market, says Currie, it’s more difficult to find hard figures, but his hunch is that credit is scarcer. ‘Historically, for sums between £1 million and £5 million a lot of decisions will have been made at a local level rather than at head office. My perception is that people at a lower level are not going to get fired for not lending money. But they might get fired for losing it.’

Another corporate finance adviser, who prefers not to be named, offers an even blunter view: ‘Certain banks are stuffed and others are absolutely open for business. How well a business markets itself to a bank, which has always been important, now matters more than ever.’

Battered banks

The complex series of events popularly known as the credit crunch have seen billions wiped off the market value of household names like Barclays and RBS, which owns Natwest. RBS recently estimated its credit market-related writedowns would be £4.3 billion this year after tax, on top of its losses for 2007. Its shares have almost halved in value over the past 12 months. Meanwhile, credit ratings agency Fitch downgraded Barclays’ long-term debt rating from “AA+” to “AA”, commenting that the bank’s ‘investment banking operations and ambitions expose [it] to risks and volatility that are not in keeping with an “AA+” rating’. The bank announced writedowns of £1.3 billion in the four months to October.

Though these problems have not hit all banks equally, Eric Gunn, a divisional director at Clydesdale and Yorkshire banks, concedes that things have changed since this time last year. ‘I think banks are cautious, and we’re no different,’ he says. ‘We are particularly cautious about some sectors; we would look at some property transactions quite carefully. But we are very keen on trading businesses.’

Mike Pauley is marketing director at FDUK, which provides interim finance directors (FDs) to growing businesses. An interim FD himself, he says that the approach of banks will differ depending on whether or not your business is an existing customer.

‘Where banks are already lending, and the time comes for the renewal of facilities, or there’s a request to increase facilities, two things are happening. They are looking much more closely at the business’s projections – even for renewal of facilities – and they are analysing the amount of credit.

‘Sometimes they then put businesses on quarterly or six-monthly renewal cycles (rather than annual ones). They are also sharpening terms, increasing margins from perhaps two per cent over the base rate to 2.5 per cent, and asking for more security against the debt.’

For new customers, the situation is worse. ‘It’s a bit like a door that is a little bit open; only a small number of applicants are going to get through,’ Pauley states. ‘You’ve really got to demonstrate a good business case.’

The particular difficulty faced by new customers in securing a loan highlights the value of building a strong relationship with your existing bank – a point banks themselves are quick to emphasise. Says Gunn: ‘There is more to banking than simply providing facilities. Because we are relationship-driven, we can put existing or potential customers in touch with others that bank with us, or point them towards other sources of funding.’

Alternative finance

On the other hand, if your bank can’t provide what your business needs, you will clearly need to look elsewhere. Pauley has just helped one of his clients complete a £100 million stock finance deal, and says that in this case going to a specialised lender was the only way to find the cash.

Catalyst’s Currie says you have to balance the benefit you might gain by shopping around for cash against your longer-term relationship with a bank. ‘I wouldn’t necessarily advocate changing your bank and throwing away 20 or 30 years of a relationship. On the other hand, certain banks out there have more money than others and will be more competitive in the current environment.’