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Why are things fraught between banks and SMEs?

02/02/2018 05:00 Comment(s) By Team GIC

SMEs and banks do not always have the best relationship. The UK is leading the way in Europe for ‘start ups’, but many businesses have become afraid of the risks involved in borrowing to help them expand their companies further. The recent call for a tribunal overseeing disagreements between small businesses and banks serves to emphasise how frequently things go wrong between smaller enterprises and their bankers, and how cautious business owners often are because of this tricky dynamic. Let’s look at why banks and SMEs are often at odds…

Mitigating Risk

Banks are dedicated to mitigating their risks. A lack of capital led to the now-infamous credit crunch and caused widespread and catastrophic consequences for both business and domestic customers. UK banks grade their risks in more stringent ways than ever before, making small businesses an often riskier, and therefore undesirable, candidate for lending. They lack the resources of larger companies with a proven track record, and as the standards tighten, there’s been a gradual downturn in the likelihood of banks lending to smaller enterprise. Banks have limited data with which to assess whether they are able to settle their debts, and this impacts SMEs in profound ways, creating significant roadblocks to expansion.
Mutual Misunderstandings

Banks sometimes fail to recognise the very real benefits of SMEs in comparison to larger companies. Their comparative lack of resources makes them far less likely to indulge in tax avoidance and other unethical practices and SME culture often lends itself to helping keep the UK’s economy on track, with owners and managers at the helm who possess all the desirable attributes which have always benefitted commerce and industry, and by extension, the world of finance. However, this misunderstanding is not one-sided and steps are required to help mend relations between the two.

The Future of SME Lending

To stand the best chance of wooing banks, SMEs need to stick to business facts and develop a keen understanding of the loan application process. They must prepare realistic figures, actionable business plans and recognise the risks that their venture may pose. Banks meanwhile must become clearer when defining their criteria. Adding a personal touch would go a long way towards helping to recuperate the image of banks in the eyes of SMEs, and likewise, ensuring watertight applications would help SMEs achieve their goals with banking assistance. 

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