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Robust Lending in Uncertain Times

March 4, 2011

An analysis in the Financial Times on 22nd February highlighted “Ten trouble spots that hold companies back”.  Ranked number four was “Finance:  Banks say they will step up lending and investment, but small businesses remain sceptical”.   Much of UK lending to larger companies was from the numerous overseas banks who left the UK during the financial crisis.

On one hand, banks are being asked to rebuild their balance sheets and increase capital ratios.  On the other hand, they are seen as “baddies” for failing to loan, particularly to SMEs.   SMEs find that there is a gap between the amounts that angel investors risk, and the amounts that support a VC model.  SME owners often recourse to second mortgages on their house – is this wise?

How can the traditional banks rebuild their reputation?  Can new banks establish a track record for lending without the baggage of the traditional players?  Are startup or niche funding specialists the answer?

Whatever the source of funding, it is important that banks make robust lending decisions in uncertain times.  What can they learn from thinking about possible futures?  What sort of framework might the big banks consider?

Point 1: the business plan  –  The business plan needs to consider more than one scenario.  Describing the possible scenarios in the business environment brings out the assumptions which have gone into the business plan, so allowing them to be tested. Many business plans have no Plan B!

Point 2: drivers of change  –  The world is changing very fast and assumptions relevant for the last ten years may not be valid for the next.  A recent report for the UK Commission for Employment and Skills highlighted 23 significant drivers of change for the UK in the next 10 years – business plans  need to be set in the context of the changes that will affect the business most.

Point 3: global role of the UK  –  The UK economy, linked as it is to Europe, is expected to recover slowly.  The UK is deeply dependent on trade.  The World Trade Organisation says 58% of UK GDP is trade dependent (compared with Japan 26%, USA 29%, France 55% and Germany 87%).  UK small companies in many sectors need to “think export” from the start of the business plan.  Here the role of scenario thinking about the prospects for different countries and markets is essential.

Point 4: the role of government  –  The role of government, its approach to growth sectors and tax is liable to change.  So business plans need to be able to anticipate the potential range and scope of these changes in order survive.


Written by Gill Ringland, CEO at SAMI Consulting

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