Bank lending and cashflow surgery: catch-up

We've picked out the key questions and answers from our bank lending and cashflow surgery with Peter Ibbetson, who is the small business banking chairman of RBS and NatWest.

Think of this as the ultimate FAQ - what small business owners and start-ups always wanted to find out from banks, but were too afraid to ask. Below, you'll find Peter's advice (and sometimes helpful readers' tips too) on each of the following issues:

• Drawing up financial plans
• Getting a loan for the first time
• Building a relationship with your bank manager
• Loans versus overdrafts
• Payment terms, invoicing and credit collection agencies
• Factoring
• Advice for start-ups
• The EFG scheme: what it's all about
• The EFG scheme: guarantees
• Getting finance as a 17-year-old
• Trying to get bank finance after bankruptcy

Drawing up financial plans

Mike: I need to show my relationship manager my business plan to get a 5K overdraft. Is it worth paying an accountant to draw up proper financials?

Mark Bellinger: My personal recommendation would be to use this amazing bit of software, it is worth every single penny

Smarta: Mike, you may also find our 500+ free business plan templates useful. You can then buy software to go with them if you find you need it

Peter Ibbetson: If you have a friendly accountant who will do it cheap fine.....but otherwise contact Business Link and ask them for help

Getting a loan for the first time

Louise: I need to approach my bank for a small loan - but I'm really nervous about it. What should I take with me and how can I prepare?

Peter Ibbetson: Don't be nervous....honest we don't bite. The best advice I can give is to be prepared. Get one of our guides, or one of the Smarta guides, with a cashflow forecast template in it and simply fill it it on sensible assumptions. Be ready to discuss the market for your idea, and be honest with the bank.

The bank....Natwest, RBS or any of the other high street banks really do want to help you, but do remember that they need to understand how you intend to repay, and to believe it. So challenge your own assumptions, go and see them, be confident and persuade them.

Building a relationship with your bank manager

hellorob@buildabrand.com: What does the bank consider when looking at financing options and with modern banking tickbox frameworks, how valuable is your relationship with your manager?

Peter Ibbetson: Relationship is really important.....not for any tick boxes, but because the banks like building up relationships and working with businesses. We look for open and honest discussions that show us that over time you can repay your borrowings and grow with our help.

hellorob@buildabrand.com: What counts more personal relationship with bank or credit history and can a relationship hold any sway at all?

Peter Ibbetson: Both important as each other, but better to have a good credit history than a bad one

Loans versus overdrafts

Helen Carr: My bank are pressurising me to take a bank loan to help out with my cashflow when what I really need is an overdraft for short term purposes. How can I persuade them?

Peter Ibbetson: If your bank is good and are recommending a loan they will have a reason for doing so......probably it's because you want to buy something and repay over a period. An overdraft is more appropriate when you are looking for day to day cashflow. You might be put off by the fee, or loan rate, but usually its no more expensive. So unless you have a good reason for not using a loan, I would go along with it... but ask them

Payment terms, invoicing and credit collection agencies

Jane Stoats: How long would you advise for payment period for invoice repayment. i.e. I'm just starting up and not sure how much leeway to give customers (B2B) - 30 days/50/etc. What are the risks with shorter/longer times? Thanks

Peter Ibbetson: Payment terms really are up to you to negotiate with your customer, but most businesses will work to a 30 day terms of trade arrangement. The important thing though is that whatever you agree you stick to and not to let your customer drag the days out. You can use the late payment legislation to force payment, but the best advice I can give is to stay close to your customer and build the relationship. Good luck.

Jane Stoats: Thanks, was thinking 30 days probably safest. What do you think of using credit agencies? Seem quite expensive and aggressive to me but I don't really know how else I'd follow up late payments and actually get them paid if customers were difficult - or am I being too cycnical about my future clients!!!!! :)

Mark Bellinger: My terms are 14 days with a 10% PCM penalty and this has worked fine with my clients, very rare that payments are later than the 14 days.

Jane Stoats: Thanks Mark, v useful. do you use a credit agency? Do you call them up 2 days before deadline or anything? Not sure how far to push it!!!!

Mark Bellinger: It's all about setting expectations and as Peter said, building a good relationship with your clients. My 10% penalty may seem harsh but I am not running a bank, I am running a business and lack of cash flow for me with NO overdraft facility would mean the end!

Jane Stoats: Thanks Mark v handy :) - do you call clients up then to chase or just email etc? or post?

Mark Bellinger: I very rarely need to chase payments, I just make sure I am always in good communication with clients, as long as it is there or there abouts on 14 days then all is cool.

Peter Ibbetson: Credit collection agencies are fine as a last resort, but if you are using then don't expect to do business with the customer again. It can also get out that you are tough....two effects of that. First you might find customers pay a bit better, but others may simply not want to work with you. Better to build the relationship up and only turn to collections agencies if things go really wrong. If the list of customers is long, have a look at factoring

You can find free invoice templates in our Tools section

Factoring

Adam Browne: Someone has recommended that I use factoring to help with my cashflow but I don't really understand it?

Peter Ibbetson: Factoring used to be seen as a lender of last resort but no longer is. Factoring or invoice discounting can offer a business with a wide list of debtors a perfect solution as it gives you up to 80% of the invoice value to you in cash on the day you invoice, it can give credit reference information, collect the debtors on time and also provide Debt Protection in the event that the customer goes into liquidation....so certainly worth looking at, Look at the Factors and Discount Association [020 8332 9955] or get in touch with RBS Factors for further information

Advice for start-ups

hellorob@buildabrand.com: what's the BEST secret insider tip you can give for us start-ups? (www.buildabrand.com is still very much in a start up phase) Any hints, tips or tricks are appreciated.

Peter Ibbetson: Best advice is plan, plan and plan more. Make sure you stick to the budget so your targets are achieved, your money comes in and you end up making a profit. Your plan should factor in your expenditures, as well as capture the income you expect. But do challenge your assumptions. Often as a start up businesses tend to be more optimistic that reality proves to be the case

Get advice on business planning

The EFG scheme: what it's all about

Ben Ridd: I heard that it's really hard to get any money from the EFG scheme - is that true?

Peter Ibbetson: EFG is a good scheme, but understand what it is about. First your business must be viable and the bank must be happy to support it. The scheme is there to provide the bank with security if you don't have it.....if you do have it we can't use the scheme.

The best way to start the ball rolling is to go and talk to the bank....Natwest has done nearly half of all EFG loans so they are a good place to start. The process is much easier than it used to be but go prepared....with your cashflow all done and challenged and any other information for the bank to convince them that the business is a goer and we will get repaid. The scheme is not a grant though.....it does require repayment

Ben Ridd: So if I have a house does that rule me out for the EFG scheme?

Peter Ibbetson: If you have a house, in your own name that has some value after the mortgage it may do.....ask the bank that you deal with.

Read our guide: The Enterprise Finance Guarantee explained

Get more advice from Peter Ibbetson in this video on the EFG scheme

The EFG scheme: guarantees

Lynda: I am getting varying feedback from banks regarding Enterprise Finance Guarantee Scheme (I'm starting from scratch with quite capital intensive business). Any tips / advice on how best to get approval / eligibility? Also is it right that banks may also ask for personal guarantee on top?? Seems to contradict purpose.

Peter Ibbetson: On the personal guarantee piece, yes the bank will probably ask for one....we generally ask for 25% at Natwest, but do understand that this is unsupported.....so we don't ask for a mortgage over your house or anything like that.....its just to make sure that you are fully committed to repayment.

Lynda: That makes sense, to close the gap. But a certain bank beginning with B wanted 100%. If I was able to guarantee that, wouldn't need / be eligible for EFG....so seemed like complete contradiction!

Peter Ibbetson: Best thing I can say is shop around.

Getting finance as a 17-year-old

Karim: Just wondering what finance options are out there for under-18s - I'm 17 and finding it really tough to get a loan and proper business account, but turning over about £350 a month at the moment. Thx

Peter Ibbetson: Two things....go and talk to your bank and share with them what your aspirations are.....so build the relationship with them. Then, second, get in touch with one of the support organisations such as the Business Link or the National Federation of Enterprise Agencies, and get their support for building your business plan. That really helps when you approach the bank.

Smarta: Hi Karim, you might find our special report on under-25-year-old entrepreneurs really useful too - explains how to get round the finance issue.

Karim: Thanks Peter, thanks Smarta. Peter is there anything in particular i could show to my bank to show them age doesn't matter! I'm already running the business you know! Think I've shown I'm responsible - it's q frustrating. Though I haven't tried RBS yet ;)

Peter Ibbetson: You don't have to look older...just be confident and demonstrate that you have the passion to succeed. if they are worried that you have no track record, do you have anyone in the family who might guarantee you for a short while

Karim: My parents aren't that well off - I'm gonna be the main breadwinner soon! ;) Someone said I should try to get a grant though first then go to the bank, would that work and where do i find grants?

Smarta: Karim you can search our grants database to get looking - it details all grants schemes in the UK & is really easy to use. You should also try the Prince's Trust.

Peter Ibbetson: Get in touch with your local Business Link and they will advise you on grants

Check out our student business section for more info like this

Trying to get bank finance after bankruptcy

Mark Bellinger: I was made bankrupt back in 2006 and have since had to grow my business with access to no credit, now in 2010 despite good trading figures I still can't even get an overdraft of £50! This is making it hard for me to grow the business at any speed, any advice?

Peter Ibbetson:  Often the best experience future entrepreneurs get is having been bankrupt first....so don't be down. In the USA it's almost a plus, but over here we still look at it as a bit of a risk. What you have to do is stick to your plan, get the cashflow straight and build a relationship with your bank. There is no legal reason why the bank can't lend to you, you just need to convince them that this time you will be successful.

Top tip

Peter Ibbetson: The banks are there to help you so don't feel uneasy about asking.

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