John Tate bemoans the difficulties of securing finance for his small IT business.

Readers who follow my column will know that I have been commenting on my experience of running businesses in the last couple of issues of Charity Finance.

I have received some positive feedback on what I have written, so I thought I’d keep going on lessons learnt. A topical issue in the media right now is the banking industry. I have written before about some of the bad experiences I have had with the service delivery of some banks. Sadly, when running my last business, the quality of their work for the company left a lot to be desired.

At the more strategic end of the banking scale, I’ll share some of my real-life experiences and the lessons to be learnt from them.

Rapid expansion

ChangeBase, the company I ran, commenced trading in 2007 and started making money in 2009. The business was initially funded by the founders. To help us with our working-capital requirements we got a six-figure overdraft facility.

Despite a growing track record of winning business and rapid expansion, the bank required belt, braces and more to provide this. They insisted on a debenture on the business, personal guarantees from the directors and second charges on our houses – just in case.

In 2009 ChangeBase generated around £1m of surplus cash and had a very strong sales pipeline for 2010. We wanted to accelerate our expansion and needed a larger working-capital buffer to manage the risk of short-term cashflow issues. The government was applying a lot of pressure on banks to lend to small businesses and had put in place an enterprise finance guarantee scheme (EFG) which would underwrite the loan and provide the bank with security in the event of a default up to £1m. We discussed this scheme with our bank – one of the top four – and they agreed we met the lending criteria: profitable; rapidly growing; and with a proven management team.

We had employed 30 new staff in the UK and the facility we requested would have added a good number of new employees to the company. However, from the outset, I got the sense that the bank really didn’t want to lend us the money. They ‘talked the talk’, and we piled the information into them – detailed financial projections; dozens of pages of business plans; really detailed management accounts each month; revenue analysis by product/customer/geography; and so on.

The weeks turned into months as the bank kept asking for further data. In the meantime we were unable to drive our expansion. So we started looking at other sources of finance – including a potential sale. In parallel, we applied to another top-four bank for the same EFG facility. We had no track record with them – unlike the bank we were using, which I had worked with successfully for over 20 years.

This process also took months. Our discussions with external investors eventually led to the sale of the company. Ironically, we got an offer for the full EFG facility from the new bank shortly before we were acquired, despite eventually being turned down by our own bankers.

Reality

Banks say they want to support small businesses but, in reality, when it comes to lending money, they demand tangible assets as collateral before they will lend anything. Although I don’t like their approach to lending, I can understand their position. What really gets me angry, though, is that they pretend that this is not really the way they think. This leads to round after round of farcical and extremely time-consuming discussions.

In the current economic climate, many charities are turning to their bankers for financial support. In this situation my experience is that you need to be prepared for a lot of timewasting if you want to borrow any cash. Most importantly, make sure you have a fallback position in place in case your bank fails to deliver. For example, a merger with another organisation or a reduction in your running costs.

In my case, the sale of ChangeBase was a decent deal so I cannot complain too much. However, I feel a deep sense of disappointment at how I was dealt with by the banks.

John Tate is a business consultant, IT adviser to CFDG and a visiting lecturer at Cass Business School