Loan refusals are a common setback for small firms trying to source finance from their bank, but the lending appeals process has become an important route both to finding new alternatives and opening up helpful dialogue between customers and their banks. NatWest provides insight as to what results the process has had so far.
Despite efforts to improve access to finance for small businesses, even now, around 40 per cent of all loan applications made by SMEs are initially declined by banks, according to research consultancy BDRC Continental’s SME Finance Monitor.
In the past, this would have always meant looking elsewhere for funding, throwing a spanner in the works for small businesses which already had a lot on their plates. Luckily, the appeals process has changed this up somewhat.
Since April 2011, any UK firm turning over £25m or less can now appeal the decision of being turned down a loan by one of the big high street banks. It gives companies recourse if loan applications are turned down, with a formal decision within 30 days.
This is particularly helpful in making sure matters are attended to quickly, as small businesses are unlikely to have the time or resources to spend on a drawn-out appeals process. Up until the end of April 2013, there had been over 5,500 appeals – and 40 per cent of those were overturned, which worked out as more than £30m injected back into the economy.
Being overturned involves both parties reaching an agreement on lending, and there’s a degree of compromise usually involved.
To make sure the process is efficient as well as speedy, each bank has its own appeals process, carefully monitored by an independent and external team of reviewers.
It’s crucial to have this element to ensure the appeals system is as transparent as possible and fair too.
Russel Griggs, a professor, oversees this monitoring and releases a quarterly report on the process for the industry. The reports have been important in showing that more and more firms are taking the opportunity to launch an appeal with their banks, and the process can serve to strengthen the relationship between banks and their customers. It helps to strip back the complexity of the application process and shed light on why a business might have been turned down in the first place.
Griggs has made a concerted effort to improve awareness among small businesses, saying it’s important that as well as making the customer aware, “we are also making sure that main contacts at the banks are aware too”.
“It opens up a new dynamic between the bank and the customer,” he added, feeling that many people had forgotten just how vital that dialogue was, because of the raft of new communications technology out there.
“For your bank contact to understand you in business and for you to understand what they want, so they can lend you the money, you have to have a conversation.”
The upfront conversational side of the process has also, he feels, given the banks the opportunity to regain confidence in the eyes of the public, and responsibility to make sure a customer understands why something hasn’t panned out.
Griggs thinks opening up more lines of conversation means small firms can also gain wider knowledge about what other options are out there – some of which are often more suitable to their specific needs. “There’s a lot of discussion about whether businesses are going to the bank for the right reasons. Depending on the size of business and what the money is needed for, there are a variety of different products and sources,” he explained.
“I’ve become a real zealot around invoice discounting which can be a good replacement to overdraft,” Griggs gave as an example. His other tip comes back to having a good credit score, which Griggs thinks isn’t always given the attention it should be. “A lot of directors think their personal life and their business life are separate – they’re really not.”
You could have the most exciting business plan going, but if the only thing a lender has to look at is you, and they see a credit score in tatters, you’re going to hit a brick wall before you’ve had a chance to progress your business any further.
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