Future 50: How to be a good borrower

Hand with tree growing from pile of coins, concept for business, innovation, growth and money

A business needing working capital is likely to get good rates from banks if it can demonstrate it is a low risk - Credit: Getty Images/iStockphoto

What steps should a growing business take to get backing from its bank? Barclays shared best practice with Future 50 members.


The Future 50 programme is supported by the partner businesses - Credit: Archant

The relationship with the bank can be one of the most important any business forms – especially if looking for credit. The Future 50 programme for high-growth companies continued with Barclays explaining what entrepreneurs should do to build up a strong relationship with their bank.

There are a number of reasons companies might wish to seek extra finance, including acquisitions, management buyouts or to invest into future growth plans.

Firms may want to acquire another company for expansion, diversification or to improve market penetration. They may need the extra finance for a management buyout – possibly as a founder seeks to exit the business, or to buy-out silent shareholders or unify a disparate shareholder base. Or they may simply need some additional non-working capital to fund growth – whether through capital expenditure, R&D or sales-and-marketing activity. 

There are other sources of finance available to suit different business needs – from government grants to private equity, venture capital or angel investors – but for many businesses, the bank is often the first port of call.  

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“Whatever the purpose, it will be considered as long as we can see it’s going to grow the business,” explains Barclays East Anglia’s business relationship manager David Thrower.

One of the key issues for growing companies is that the value of the business can outstrip its physical assets. This means banks are lending based on the cash flow. “Cash flow lending will generally be considered for established business with a good track record of retaining profits, but the problem with that is there’s often no security for the bank,” Mr Thrower says. “So we’re really reliant on the quality of the business.” 

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This means when the business needs additional funding it has to demonstrate certain things to reassure the lender. First of all, it’s important for the bank to understand the vision for the business – and that it’s clearly understood by everyone in the company. 

Even more important is the business plan. “Everyone can plan for internal factors – things within the company,” cautioned business regional manager Glen Webster, who recommends that businesses conduct a PESTLE analysis of their plans. 

“A PESTLE analysis is about looking at those external things potentially outside your control: the political, economic, social, technological, legal and environmental factors,” he said. “You can consider how you can mitigate them and build into your plan to a framework for these external factors.” 

One of the most important considerations for lenders – especially when looking at cash-flow borrowing – is the strength of the management team, so it’s important to demonstrate competence. Historical performance is a good start. 

“The bank will want to assess whether you’ve had an impact on your own business or whether it’s just the market moving towards you,” says Mr Thrower.

Your bank will also need to understand the nature of the revenue stream – whether it is one customer paying £100,000; 10 customers paying £10,000 or 100 customers paying £1,000. 
“We need to see how reliant the business is on one or two income streams, to understand what the impact would be of losing one or more of them,” says Mr Thrower. 

For lenders, advancing funds for growth activity has the least risk attached: it’s the same team, doing more of what is already growing the business. Backing a management buy-out can also look like a fairly safe investment, particularly if there is a degree of ongoing involvement from a business founder to help maintain the course that has seen the business growing. 

Acquisitions can have more risk attached, so businesses will need to help the bank really understand what’s being bought.

“The good news is that if the bank sees you have a stable, strong business, the risk profile is low – so typically the cost of borrowing is low,” says Mr Thrower. This will always be considerably lower than the cost of finance from a second-tier lender or equity-based investor. 

“Help us understand what the risk is and we can do it,” he concludes.  

For further information, see https://www.barclays.co.uk/business-banking/

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