There is a lack of understanding between banks and small and medium-sized businesses (SMEs), accountancy firm Kingston Smith suggests following a new study.
A degree of misunderstanding is acting as a barrier to SME lending, the firm believes, holding back potential growth.
The report, which comprised of face-to-face interviews with policy makers at five major and challenger high street banks and SME owner/managers, finds that the majority of SMEs think that each bank’s lending decision criteria is a black box – of which very little knowledge is possible.
Businesses, Kingston Smith adds, are unaware of the need to have a good credit rating, realistic business plan or requirement to share financial risk.
Michael Snyder, senior partner of Kingston Smith, comments, ‘If banks felt able to price loans differently, charging a realistic interest rate that would allow them to be profitable, then greater risk would be acceptable.
‘Unfortunately, perceptions surrounding the cost of finance – what it should or shouldn’t be – is causing a huge barrier to both banks and SMEs.’
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The report has put forward a number of suggestions to eliminate the misunderstanding that exists such as providing clear details on loan criteria, describing how credit history can impact decision making and giving feedback on loan decisions.
SMEs, the firm says, should be putting together realistic business plans and seek expert feedback before approaching banks. Banks, it adds, will focus on different sectors at different times – something businesses should be aware of.
Mark Saunders, professor at the University of Surrey and co-lead on the research project, adds, ‘Whilst SMEs need greater clarity about the process by which banks make their lending decisions, they also have to keep in mind that loans are made on a commercial basis.’