Finance for business - it's a new ball game

The global financial crisis has changed the business finance ground rules somewhat for SME businesses needing funding. The non-bank lenders have largely vacated the scene, and the remaining big banks have revised their lending criteria - essentially becoming much more risk-averse.

This means that there is now a much greater focus on a borrowers' credit-worthiness, and even though official rates are low, the business borrowing costs are potentially high. This reflects the shortage of capital in global markets, caused by historically low confidence levels.

Therefore, more than ever before, SME businesses needing business finance must focus on their perceived credit-worthiness. Some tips for doing business in the "new order" are:

• Keep Tax Office payments up to date and pay on time. Tax Office arrears are commonly found in failing businesses, and send a bad signal to a lender

• Manage supplier payments closely, to avoid arrears and the possibility of formal action (e.g. a summons) appearing on your record - also another bad signal. If you experience a cash flow hiccup - act early to resolve the issues, or re-negotiate terms, and keep all lines of communication open and accessible. ("Going to ground" in a crisis never works.) 

• Look after your most important creditor - the bank (or other lender). Meet their information requirements before deadlines, be proactive in discussing any problems or needs, and religiously observe repayment schedules. 

• Bear in mind that the age of your business, and having a 3-year profitable trading history are heavily weighed in the bank's normal calculation of business finance risk. If your business is new, or the recent trading history is patchy, expect to make an extra effort in preparing cash forecasts, realistic business and/or marketing plans and other plausible background information which will support your finance application, and lower the perception of risk. 

• A business which produces regular (e.g. monthly) management financial statements with comparisons to budget will always appear to be better managed, and usually will be.

In uncertain trading conditions, it's time to revise your reporting and budgeting processes, as the margin for error is likely much thinner than it was a year or so ago.

Banks have also recognised this, and are actively discriminating between businesses on the basis of the quality of their financial management. More about bank finance here: Bank Finance