Money talks

WM's finance roundtable event... part financial summit, part marriage counselling session. Manufacturers, like long suffering spouses, complained bitterly at being dumped for younger, sexier alternatives. Banks confessed to past mistakes but promised to change if only they were given one more chance. "The relationship has died over the past five years," Peter Bennet, managing director of Christchurch-based Groveley Precision Engineering, told banking chiefs who've committed to lend an extra £76 billion to businesses like his this year. "A lot of SMEs have jaundiced views because of what's happened to us over the years. We appear to have been punished at the expense of other things that were trendier to invest in," he added. Banks sporting everything but a dozen roses were quick to reassure. "I absolutely understand why you feel jaundiced," said Alexander Baldock, MD at Lombard, the asset finance arm of RBS. "I can't be successful unless I'm finding ways to lend to you. That's why we're sitting here and that's why we're lending 15% more this year than last." "What's gone is gone," offered Stephen Pegge, director of SME markets at Lloyds. "We're not going to be able to make up for losses in the past. So we want to do new business that makes some money." And manufacturing is earmarked by the banks as a lucrative source for doing just that. The lustre can in part be traced to Project Merlin. The deal with the government ties all five of the banks attending WM's meeting to lend an extra 15% to SMEs in 2011. Manufacturing SMEs are a preferred investment route, said Mark Lee, head of manufacturing at Barclays Corporate. "From a track record perspective, from an impairment perspective, manufacturing has performed extremely well for us as a sector... we like the manufacturing sector." But banks have a funny way of showing it, claimed factory owners. "Everybody I've spoken to says the banks aren't lending. Whatever they say, they're not lending," said Nick Bion, managing director at Reading-based perforating specialist Robert Bion. "Someone I spoke to said he used to have an overdraft and when he went to reinstate the facility, the relationship manager at the bank just laughed." Financiers challenged the anecdote as the exception rather than the rule. "The approval rates – and these are independently verified – are around about 80%. Overdraft utilisation is actually declining," said Mike Conroy, senior manager, strategy and implementation at HSBC. Banks cited a 20% increase in deposits from SMEs as further evidence of a dwindling appetite for fresh finance. Investment capital is available, according to the stats. The real issue is finding businesses that want to borrow, reflected Damian McGann, head of business development for commercial and corporate banking at Santander. "There is this pent up demand and everyone around this table is looking to do more business, yet there does seem to be an element of apathy. My question to you is how, as banks, can we tackle that?" Stop clinging to securities, was the resounding response from manufacturers. Banks can cite as many positive lending figures as they like. But when personal wealth is needed to access capital it's a more complex commitment, business owners said. Bion commented: "You don't appreciate the emotional significance of putting up your personal assets – I'm not aware of anyone in the banking world who's put up theirs," he said. "I grew up in a house which my father had put up as a security against the business. If it failed we were going to get a £10 ticket to Australia. When my father took his deeds away from the bank they just reduced the overdraft – they didn't speak to us, they just wrote to us." Bankers' attempts to empathise only drew further ire. "I think we can all appreciate the emotive nature of putting your own house up," said Baldock of Lombard. "Well, I don't think you can if you haven't ever put your house up as security," retorted Bion. Pegge stepped in to support his colleague. "We all do through our mortgages. We have a loan to buy a house." But Bion quashed the comparison with ferocity: "No, presumably unless you have over borrowed, the mortgage is less than the price of your house so you can sell up and pay off the mortgage." Personal guarantees Around two thirds of lending by Lloyd's required security, according to Pegge. Business assets were the preferred format though sometimes personal guarantees (PGs) helped banks secure cheaper rates, he added. The PG may be unpopular, reflected Conway of HSBC, but manufacturers had to appreciate its appeal. He said: "Put yourselves on the other side of the desk. Here's someone who tells you their business is marvellous, look at our plans they say, but they're not prepared to put up their own personal guarantee." Yet the hefty price tags of manufacturing plant meant assets took on the guise of PGs for many small business owners, claimed Bob Tunks, owner of BK Tooling, a Hertfordshire-based manufacturer of plastic injection mould tools. "If you look at a hairdresser or someone providing digital services, for example, the asset level is probably a few thousand pounds... If you go to a small manufacturing company, you'll see a very different scenario." BK Tooling had recently invested around £400,000 in plant with finance commitments peaking at around 20% of turnover, Tunks revealed. "When you ask about commitment and personal guarantees, that is one hell of a commitment. I'm going to kill myself before letting that company go under." Friction over PGs highlighted misconceptions over the role of banks, financiers claimed. "We're not about risk capital. We can only afford for about one in 100 loans to go wrong or we go under," said Baldock. Barclays' Lee added: "To me, this is about considering the risk spectrum... On both sides of the table we need to be very clear on where we are in the spectrum when we lend." When banks ask for security and PGs, he added, they only do so to shield themselves from perceived high risk. Asset finance was lauded as a smart alternative for those nervy over securities. Banks pondered the prospect of extending mezzanine finance – a high risk loan where unpaid debt can be recovered as equity from the borrower. Yet with APRs anticipated at 50% in some cases, it's unlikely to be a crowd pleaser. One thing that will win popular backing is providing specialist branch managers with greater lending power. "I haven't got a bank manager that understands my manufacturing business," complained Bennet. Bank managers should be oracles- providing a reference point on funding support as well as offer best practice advice from working with like-minded SMEs. "The value I want added is from an expert in my area, not just someone who lends me money," he added. Bank accepted the criticism and vowed reform. "In common with others, we have deskilled our relationship managers," said Baldock. "Clients are saying they don't get the same quality of interaction as they did 20 years ago. What can we do about it? We can invest in it; we can make sure that local bank managers have fewer customers to deal with and that we have specialists in manufacturing." Branch managers who know their ERP from their elbow offered universal benefits, added Bennet. "I know I'm a good business and I can tell some of my competitors are not simply by walking in their door. In essence your risk would be less if your bank manager could do the same." The point bought plenty of nodding of heads from the assembled banking chiefs. The two sides could reflect on a passionate and, on occasion, prickly but ultimately productive debate. Said Tunks: "This is the first time I've heard you guys talking like this – saying we're flavour of the month and you want to lend to us." Top marks to the banks for wooing, then. But until the promises come good there's a lingering suspicion among SMEs that financiers might just be flattering to deceive. "We can sit here and say lots of fine words and you've heard a few," accepted Baldock. "But they mean nothing unless we deliver. What' I'd encourage you to do is take us up on it." Flashpoints and fixes 1. Personal guarantees A real sore point for SME manufacturers, who accused banks of failing to grasp the emotional significance of personal guarantees (PGs). Banks were also criticised for clinging doggedly to assets even when they were no longer required. One manufacturer gave the example of a bank refusing to give up the security of his father's house when he retired from the business. Banks promised to be more proactive about releasing PGs. However, guarantees will remain. Those who put up a PG are more likely to pay back, according to financiers, and securities can land better borrowing terms. Remedy: Banks to be more proactive in releasing out of date PGs. Asset finance is an alternative for manufacturers unwilling to follow the PG route. 2. Old grudges The frustration of playing second fiddle to the service sector still smarts manufacturers. Frustration spilled over during the debate with SME delegates hitting out at reckless bank lending before the financial crash and favouritism for trendier business sectors. These hang-ups have created a spirit of financial independence within SME businesses that means new finance under Project Merlin is going unused. Remedy: Manufacturers to give the banking sector a second chance with more regular face-to-face discussions between the two sides at events like this. 3. Decline of the branch manager Factory managers pine for a return to the days of kipper ties, Ford Cortinas and bank managers who knew their business inside out. Modern incumbents lack the sector knowledge and clout to make financial decisions, they said. Banks admitted a wrong turn had been made in disempowering managers. However, Lloyds claimed its branch managers are typically long serving, with lending discretion of up to £500,000 given to senior staff. Barclays said the feedback vindicated its decison to have a manufacturing focussed division. Others vowed to invest in upskilling managers with a sector-specific focus. All banks ruled out a return to the days of unchecked local lending. Remedy: Banks to invest in upskilling branch managers with manufacturing know how and handing back some lending discretion. Manufacturers to offer feedback on core services they want from local manager. 4. Poor communication Manufacturers seemed surprised banks actually wanted to lend to them. Banks were surprised they were surprised, claiming their desire to lend to the right businesses had been on the agenda for a long time. Something is clearly being lost in the ether between the two sides. It's the same with risk capital and timescales. Manufacturers perceive banks as being in the risk business. Banks say they're not built to sustain high risk ventures. Manufacturers operate to long-term business strategies with equipment payback over 10 years or more, in many cases. Banks want short-term paybacks and fail to appreciate this longer term view, said SME manufacturing delegates. Remedy: Bring both parties together for regular talks through a manufacturing/banking forum. At the WM finance meeting, the two sides agreed they both suffered negative press but, by joining forces, they could try and develop more stories that were pro banking and pro manufacturing. It's good to talk. Bankers' views "As an industry, one of the things we need to do is to try and help educate people in how to approach banks in the right way, presenting cases in a language we understand." Mark Lee, Barclays "Allowing for the real cost of funding capital costs and a bit of bad debt, we can afford for one in 100 loans to go wrong before we're under water." Stephen Pegge, Lloyds "As an industry we're not good at being proactive. If, in three years, your business is in a different dimension, we should come to you and say we know we had a difficult discussion and we came down on the side of a personal guarantee, but we'd like to offer you that back now." Damian McGann, Santander "The past 20 years have seen a dumbing down of the relationship manager and a disempowering of the role. We see that as a mistake and one we're trying to rectify... but there are bounds. We won't see a return to the days of managers having untrammelled lending discretion." Alexander Baldock, Lombard "We're not investing as shareholders would. Simplistically, we're taking money from depositors, who expect to get their money back, and giving it to businesses at a charge. We're not in the risk business that people seem to think we are." Mike Conway, HSBC