What makes your business investable or lendable? It’s a question we rarely see answered by the main High Street banks.
Lenders should know enough about what works and what doesn’t in the market to provide some clarity on their financing decisions – and assess businesses not on crude averages, but on their own merits.
So here are the four lenses we use to evaluate companies seeking finance. They don’t have to hit a home run in all four – but they do help us make bolder decisions with more certainty.
1. Sector sustainability. Regardless of individual merits, it’s reasonable to look at sectors and ask: is this something we think is backable? There are some areas that leave us feeling nervous for reasons of social responsibility – we avoid weapons manufacturers, for example, and tobacco businesses.
Apart from the ethical dimensions, these sectors are vulnerable to regulation and reputation issues. And if a business is reliant on sweat-shop factories overseas to be profitable? That can and should affect lending appetite.
Some sectors prompt extra checks too. In fisheries or forestry, for example, there are standards companies are expected to uphold around the environment. This isn’t about avoiding bad PR. We like to help finance businesses that benefit society and future generations because they’re in it for the long term. So are we.
2. Our clients and their clients. We like to know the people we fund. And that’s not just an example of how we differ from some other lenders or High Street banks, where knowing the customer is a tick in a regulatory box.
On the negative side, working with disqualified directors and companies whose reputation is poor is a risk management issue. We understand some businesses might have issues with HMRC once or twice, for example. But several times? That’s a bad sign.
But let’s focus on the positive: why shouldn’t your high Net Promoter Score result in a better deal to finance your business? After all, if your clients love you, they’re likely to be loyal – which is a lower risk for us.
Clients with happy customers are also more likely to treat them fairly and be transparent in their dealings. That means fewer disputes and more repeat business – big plusses for offering finance for growth.
3. Visible assets. To be honest, this still one of the biggest factors for any finance provider. Bottom line? The less reliable the asset, the harder time we’ll have lending against it. But it pays to look closely to deliver the best deal for your business.
Receivables, for example, fall into different categories. For goods and services that have been delivered? That’s ideal. But invoices raised on part orders or long-term service contracts? They’re not useful.
Real assets – plant and machinery, vehicles, anything that sits at the heart of the business’s ability to create value – are also prized. Any lender should take time to understand what’s really valuable in the business, and finance accordingly.
4. A vision and a plan. When you take time to talk to business owners and managers, you get to the heart of how they add value: commitment and vision. Can they explain their business philosophy to us in a compelling way?
If they can pitch it to us, we reckon it’s a good bet they can convince the market and their customers that they’re onto something. We like to see clear plans within a viable strategy delivered by great people.
When those things are in place, we can afford to be flexible over other factors. We had a manufacturing client that ran into difficulties, but the people, products and plans were all outstanding. So we worked with supplier, employees and customers to phoenix the business and save jobs.
Taking a closer look at these factors often helps us to finance businesses other banks wouldn’t touch. In a turnaround, for example, finance is critical – as the business recovers through growth, its working capital needs grow, too. Many banks’ lending black box will reject these businesses because they’ve struggled recently. But if they look good through our four lenses, we’ll always have an appetite to help them grow.