You need thick skin to work in banking these days. The credit crunch and subsequent recession did little for the sector’s reputation. Many small businesses we’ve spoken to over the past three years have bemoaned the lack of bank funding available to businesses they believe are viable and looking to grow. So when we got the chance to grill RBS’ chairman of small business banking, we decided to let you ask the questions. Here’s your interview with Peter Ibbetson:
How close to grassroots small businesses are you? Can you give us some examples?
I’ve been associated with the small business world for about 20 years in the banking sector so I understand the SME world very well. I am a non-executive for several small businesses. I do find myself at the coalface of SME issues day in, day out. One of them is a small business that has some private equity in it. The other one is a family business that I chair. I understand the way small businesses work on a day-to-day basis as well as from a banking perspective.
What’s the outlook for lending?
The outlook for lending depends very much on businesses. There’s some very clear evidence that demand for business lending has declined during the down-cycle. It always does. Businesses tend to repay the bank back much faster in a down-cycle and we’ve certainly seen that. During 2009 we saw business repayments coming back 50% faster than they’d done in 2008.
A lot of the outlook for lending will depend on the economic recovery and confidence in the business sector to feel that they actually now want to borrow to invest. A very good surrogate for this is white van registrations. During 2009 white van registrations reduced by 40% compared with 2008, so we know businesses have reduced their investment appetite.
How has much has RBS lent to small businesses during the recession and how does it compare to other banks?
We’d like to think that we’ve supported as many businesses as we possibly can and that’s our role. We’ve got about 1.25 million businesses that bank with us and we see it as our responsibility to support those businesses whenever we possibly can.
At the moment, we sanction 86% of the credit applications that come to us. That’s consistent with the up-cycle, so we’re sanctioning the same sort of percentages as we see in the good times as the bad times. In the first six months of this year we’ve lent over £20bn to SMEs. But we do emphasise that when we’re asked to lend money we can only do so if the company we’re lending to is viable. That’s the responsible way to lend – for the bank, the taxpayer and for the business.
How much has been secured via the Enterprise Finance Guarantee (EFG) scheme?
We have been the major bank in that scheme. We worked closely with government at the very outset. Personally I spent a lot of time with government putting that scheme in place. We see it as a very important scheme for those businesses that are basically viable but have run out of collateral. We’ve lent nearly £500m through the scheme.
What percentage of loans are put through the EFG scheme?
Around about 3% of bank loans are going through the EFG at the moment, so it’s a fairly small percentage of overall loans. However, it’s a very important percentage. These are the businesses that haven’t been able to get commercial finance but are viable.
With lending harder to come by for early stage businesses, what are the essentials start-ups need to have in place before approaching the bank for a loan?
The most important thing we look for every time somebody comes for a loan is how are they going to repay. Come along with cashflow forecasts, a track record, projected profit forecasts. There are several websites you can visit to look at business plan requirements including our own. Coming with those completed, well thought through, and challenged is probably the most important thing you do. We issued a brochure last year which actually went through why cashflow is important, both for the business and for the bank, then what we do with it.
We look at profit margins and if the profit margin has increased from 10% to 15%, we would ask why and would sensitise it downwards. Similarly with debtor periods, if you’re running at a debtor period of 50 days and suddenly you put in your cashflow forecast that everyone’s going to pay after 30 days we would challenge that. It’s important that you do those financial information pieces, but also that you challenge that financial information yourself. So when you come in, we can see that you’ve really thought about it and can work out what the best facility is and can demonstrate whether you can afford it.