The rules of engagement

It has become received wisdom that since the world's banks were caught with loan books full of bad debts, they have pulled up the drawbridge on small and medium-sized enterprises (SME). But this is only true to a point. Funding is available for firms which take the time to present their case to banks well.

There was a time when a good relationship with your bank was crucial. If the trust was there, it could take little more than a phone call to a relationship manager to extend a line of credit or arrange new facilities.

But nowadays arranging credit is often beyond the remit of any individual relationship manager, even if they are sympathetic and understand your company. A good rapport with your bank is still important, but it's the numbers that do the talking, regardless of the length or nature of relationship you have with it.

Contrary to popular belief, banks are still prepared to lend to SMEs. But while initiatives such as Project Merlin - an agreement between the Government and the UK's five major banks to increase lending to businesses - look to make it easier for SMEs to access credit, banks' appetite for risk has changed, meaning many SMEs are missing out.

This situation is not due to a lack of funding. It is more that banks are increasingly thorough in their approach to lending. They will demand convincing evidence that any SME requesting funds has a real need for the money and a watertight plan to repay it. Unless all the boxes are ticked, the coffers will remain closed.

It is not just a case of dredging up last year's accounts, but presenting a tailor-made package of information to make the case for new finance. The saying that ‘by failing to prepare, you are preparing to fail' has never rung more true.

While each case is individual, your chances of securing funds will be vastly improved by following these five key steps:

1. Prepare a business plan

A detailed business plan is essential to any request for bank finance. Reams of figures are not enough. They must be presented in ways that banks understand and trust.

2. Present your case

The bank will not only want to see detailed evidence of cash flow, profit and loss accounts, balance sheets and liquidity reports. It will want to be sure the SME genuinely needs the loan, it can demonstrate how it fits into the company's business plan and how the funds will enable it to operate more effectively.

3. Do your research

Financial forecasts and business plans must be well grounded. Banks will need convincing that firms understand their markets thoroughly and are realistic about their prospects for expansion.

4. Be accountable

If a loan is granted, there will always be strings attached. In the past a bank might be forgiving if a minor term of the covenant was broken. Now every rule must be obeyed. For example, in some loan terms banks will demand oversight of the accounts every quarter. A regular covenant agreement is highly recommended.

5. Good housekeeping

Businesses should have a strong grasp of their financials at all times, not just when they are seeing the bank. An increasingly popular option for SMEs is to outsource their finance functions. At TAL-London, we can provide firms with the equivalent of a virtual finance director and prepare management accounts, making it simple for us to advise firms when the need for credit arises.