After all the hype about the Royal Bank of Scotland lending to small and medium-sized enterprises, we thought we would do a little experiment to see why they are finding it so difficult.
We decided to approach RBS to find out what their lending criteria would be on starting up a bakery. Masquerading as a would-be bakery start-up, we disclosed that we wanted to raise £120,000 with our own cash contribution of £40,000; in other words we looked to a loan to cash ratio of 3:1. So our business proposal was not sexy or complicated – it was just an ordinary business, which is needed in the food chain of the economy (after all we all like and need to eat bread).
You can guess what happened next. RBS (and others) told us that this proposal had no merit. In particular, RBS said that until the business was turning a minimum of £250,000 we could only be considered for a loan of £25,000. There were no other questions and nobody asked us where the business is located, what our business plans are, whether it is freehold or leasehold or if there was any other security. In short there was no interest whatsoever to see how this business could move forward.
I think examples like this just show that there is such a big gap of understanding between what banks are prepared to lend and what SMEs need in order to organise finance to start and run a new business. As long as this is the case there will be an institutionalised reluctance to lend to SMEs.
For the avoidance of doubt, this note is not pointing the finger at RBS – based on our experience, most other banks have similar rules and criteria. Having said this there are some, but not many, banks who would lend to businesses like this. It is not surprising that many SMEs would rather delay or postpone a decision to expand or start before they embark on the frustrating journey of trying to find loans through the traditional banking channels.
Henry Ejdelbaum
ASC Finance for Business
London
