When banks say no

Sahar Hashemi, co-founder of coffee-shop chain Coffee Republic, got 39 rejections for bank finance before getting a yes. She knows people who got around 700 rejections before hearing the Y-word.

Rejections for small business bank finance are not unusual.

But rejection shouldn't spell defeat. Despite a crisis in confidence - a Close Invoice Finance survey found less than 6% of 500 small and medium-sized businesses were confident their bank would extend them credit compared to a much more optimistic 73% at the same time last year - banks are lending.

Smartfundit.com, the world's first business finance marketplace, released a report in February that assured "banks have continued throughout [the downturn] to release critical business financing to UK SMEs, with deals still closing within a matter of days."

As an example, even the Royal Bank of Scotland is lending to five to six small businesses a day, to the total tune of about £15,000 a day - and it's sanctioned a further £25m worth of lending in anticipation of a 50% uplift from that.

"For me it's a numbers game - you should almost notch up your rejections," says Hashemi. "My formula in life is that for the 20 times you ask, you should expect to get no's the first 19 times and only then should you start expecting to get a yes."

So when you come up against your own personal Dr No, don't lose faith. Learn from your mistakes, keep going, and use the guidelines below to give yourself the best shot at making your next pitch for bank finance that bit closer to being successful. Even if you're still 19 applications away from success.

The Spanish inquisition

If computer says no, you need to find out why. The best entrepreneurs learn from each rejection they get rather than being defeated by it, using the most specific feedback they can get to refine an application and stand a better chance next time.

Interrogate the bank manager who denied your request for finance. Find out exactly what you're missing. Don't be shy - they'll appreciate your determination.

The lending criteria: show them the money

If the financial world was our galaxy, risk would be the burning sun at its centre, the gravitational heavyweight around which all life revolves. Banks have spent decade after decade collating and analysing business performance data to figure out what exact requirements a business needs to fulfil to make their investments as low risk as possible. Lending criteria is the result of all that information and calculation.

And if you don't meet the lending criteria, you don't stand a chance.

Peter Ibbetson, chairman of small business at Royal Bank of Scotland, explains that "the basic criteria is: can we see the borrowing repaid? That's what it's all about. How a business is going to go forward with its cashflow, how it's going to repay a borrowing. It's all about cash. Cash is king."

Security is "often" an issue too. "But the security is the sleep-easy piece of the equation, it's not the critical piece.

"And it's personal guarantee of the directors as well. So if you borrow as a sole trader, then you're personally liable for the debt that you're incurring."

Paul Mayer learnt that first-hand. He spent 18 months trying to get finance for his indoor skydiving tunnel business Bodyflight.

"The banks won't invest in a no security situation. If you want to borrow from a bank, you've got to have something they can take off you."

Despite the quirkiness of his idea, his business model and plan were solid, return on investment looked good and similar projects had been successful elsewhere in the world. "A couple of the banks said, 'We're really upset that we can't help you - but we've got very strict lending rules that you don't fit'. 

"It wasn't really the individual bank that was the problem, or the pitch - it was the nature of the business. If it didn't work or if the market wasn't there, then there was nothing for the bank. We had no security."

What eventually enabled him to get the bank funding he ended up with was an investor coming in who had run a virtually identical business in Sweden.

With hard proof of the business model's viability and relevant experience now on board, Mayer successfully applied for the Small Firms Loan Guarantee (now evolved into the Enterprise Finance Guarantee (EFG)).

It was a deft move. With the Guarantee acting as security, the bank was happy to lend him the £300,000 he needed to complete the project.

For Chris Kane, "winning profitable work" before returning to the bank made the difference. His property startup Greendale Construction was turned down by five banks when he started doing the rounds in 1989. "The banks say it's the lending criteria and that's it," he says.

In conditions nearing the economic toughness business owners face now, he and his partner failed to meet the lending criteria on pretty much every count: "Everything was going wrong in the property and construction sector, we had no track record and no money. We started off with absolutely nothing."

But once they got their first contract in place with an understanding client who knew about their financial situation, and the bank could see the amount of money that would be coming in, they got a facility of "a couple of grand". They haven't needed any further debt since and now turnover £8m annually.

Say the right things and make it look flash

If you know you had the financias in place, it's time to examine the presentation.
Ibbetson explains what's needed of a good pitch: "Bring the financial information. Bring the cashflow so that we can actually challenge that cashflow, bring your profit forecasts. Bring your supplier lists, bring your competitive analysis. They're the things that are so, so important."

Graphs, tables and diagrams make what you're saying quantifiable, real and easy to understand - but they must be underpinned by a fierce thoroughness with the numbers you're suggesting. Knowing your numbers like you're about to go on Dragons' Den gives the impression you're professional and in control of your business.

Finding your Mr or Ms Right

There are some marginal although unreliable steps you can try taking to improve your chances of finding the person and bank most likely to give you finance - research both the bank and the manager's track record in your sector, feeling out what rapport you can build with them.

But, as Hashemi points out, it's most likely going to be "totally random". She says the reason she finally got a yes was: "We finally found the one bank manager that needed to give a loan that day."

She points out that "people reject you for different reasons - it can be even if they're just having a bad day that day. It just doesn't mean anything really, they can change their mind."

Though this may sound frustratingly illogical, she adds: "Money is cheap now and banks are under a lot of pressure to lend, so you just need to find the one bank manager that needs to give a loan."

Plough on

Of course, applying time after time-after-time can be at best disheartening, at worst crushing enough to put you completely off starting-up.

Hashemi urges other finance-seekers to remember rejections are "meaningless really".

She explains: "You've had time to absorb your idea, you've lived with it. But someone you ask will only get five minutes to look at it. So how would they have the same enthusiasm you do, how could they be able to immediately bounce back and say it's a phenomenal idea? It takes times for people to come round to an idea."

Ibbetson confirms this: "Sometimes people see banks as a little bit dour because we challenge the optimism. Well that's our job, and that's healthy for everybody."

If you want to make it as a business owner, you have to persevere. "It was a hard slog," says Kane. "But we're very determined people. We wanted to be successful so we just had to keep going, keep going, keep going.

"Anything that comes easy is not worth having."

Time to reassess?

Having said that, you also need to know when it's not the bank, the bank manager or the pitch that's at fault. It's the idea.

We want businesses to succeed as much as anyone, but if bank after bank is telling you that your business just isn't going to work, it might just be time to listen.

"Often the fresh eyes of the bank are able to see that where as a business owner necessarily see that quite so easily," says Ibbetson. He explains RBS's definition of viability: "We simply mean that if we lend you money, can we see a way for that money to be repaid."

And without money coming in, there is no business.

The round-up

So, to stand the best chance for you next bank finance application, make sure all the following are in place:

  • Your business can make money. Sounds obvious, but needs to be extremely well thought out
  • You have a clear plan of how the money you want to borrow can be paid back, and when
  • You have a clear business plan, cashflow, profit forecasts, supplier lists, competitive analysis ready to present
  • You have displayed these clearly and in an engaging way and have practised your presentation
  • Ideally, you have relevant experience in your team, and/or first orders placed
  • You have some form of security against the loan, either privately or through a government-backed guarantee
  • You're applying to the bank most likely to lend and ready to find the right people within that bank
  • You're ready to take rejection and feedback on the chin
  • You're ready to try, try and try again. And then try some more. If you believe in your idea, it'll be worth it

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