EDITOR'S BLOG: Why the banks are right not to lend to some small businesses

No, it's not because Smarta has a partnership with NatWest.

But because, like Lord Sugar, I've continually watched the banks get bashed when it comes to small business lending without any real questioning of exactly why they're not lending.

I've every sympathy with the small businesses who've suffered at the hands of banks who've reneged on lending terms over the past few years and wouldn't for a second doubt that some stunningly viable businesses don't, for whatever reason, secure lending when they should.

[update] Nor would I question that demands for security against loans prove prohibitive.

But… and it's certainly not cool to admit it, many of the small businesses rejected for business loans are woefully underprepared and simply not ready for investment. I wouldn't lend them my money and I'm sure many of the people bemoaning the lack of small business lending wouldn't lend them theirs, either.

If more people bucked the trend and stopped jumping on the bank-bashing bandwagon and looked for other reasons why bank loan applications are rejected, it'd be a far more constructive debate.

Equal to the frustration of perfectly viable businesses not securing the funding they need, are the thousands of potentially brilliant businesses that rush to the bank before they've thought out answers to the most basic of lending questions.

The chief one being: How are you going to pay back the money?

And this doesn't mean answers based on pie-in-the-sky sales forecasts or grounded on any of the following assumptions:

-          a percentage of your demographic/sector/city/country will suddenly decide to buy your product from day one

-          your business isn't going to cost anything to run

-          you won't need to pay yourself anything

-          your suppliers won't squeeze you or go bust

-          a 'meeting' with a potential client equals a sales order

Let's not even get started on the lack of an actual model, revenue streams or notion of when exactly you might break even. Or any justification of why YOU might be the person to make all this happen, particularly if you don't have a track record or any solid trade or business experience.

Obvious stuff, right? Well you'd have thought so, but the blind excitement of unleashing their baby on the world can cloud the judgement of even the most sober of individuals. After all, no parent thinks their child is anything but adorable, do they?

Like it or not, it's the bank's job to act as beauty contest judge and deliver the harsh truth that your bundle of joy mightn't be quite the looker you'd thought.

Banks are many things, but they're consistent in one regard: they always want to know how they're going to get their money back.

Enthusiasm, passion, even a great product, gap in the market or particularly-enterprising individual doesn't, alone, answer that question. Clear, well thought-out and presented business plans and viable business models do.

Save the patter for how your business is going to revolutionise your industry and just focus on who's going to pay for it and when - then what's left over once you've coughed up the costs.

Oh, and because Smarta is sponsored by Natwest, here's an interview with the man from the bank on what he wants to see before lending.

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