Heartbreaking. That is the word used by governor of the Bank of England Mervyn King, to describe the treatment of some small businesses by banks.
Over the last week, major high street lenders have announced improved profits while cash-starved small businesses clamour for them to ease their lending restrictions. Let's examine the current position.
Average monthly lending by the major banks has almost halved in two years from £991m a month in 2008 to £564m in 2010. More than 90% of independent retailers rely on finance from the four main banks. The perception is that these banks are increasing their operating margins at the expense of small businesses. So funding becomes harder to get and business is restricted.
Like all of us, banks have had to respond to the recession by becoming more vigilant in avoiding bad debts. But independent retailers need credit and finance more than ever to successfully expand their businesses.
The independent retail sector by definition is fragmented. So to borrow money we have to jump through bureaucratic and time-consuming hoops. Retailers feel under pressure from the banks to agree to additional costs, like increased rates, set-up fees, valuations and debt hedging. So if we are successful in borrowing money, our euphoria is dampened by having to pay a premium.
Gone are the days of getting a quick decision from your bank every application now involves masses of paperwork before a decision is made by an unseen credit department in the bowels of the bank's head office.
But, as Tony Soprano would say: "Hey! Dat's da way it is". We've got to live in the real world and accept that things are not going to change dramatically overnight.
So what can we do? Well, the Chancellor of the Exchequer, George Osborne, has said that the banks have "an economic obligation" to lend and, helpfully, the banks have agreed to form a task force to investigate themselves and report back to the Chancellor by October. The words 'breath', 'hold' and 'don't' spring to mind here.
So is there anything the independent retailer can do to help himself? Well, there's no panacea, but, with a more professional and methodical approach to the finance application, it is possible to improve your chances of success. Like everything, it's about preparation and understanding.
Angela Knight of the British Bankers Association has said: "There are funds available to lend firms with a viable business plan." So, prepare a viable business plan for the bank to release some of those funds. That means reviewing your business and addressing things that are wrong.
Prepare in detail for that application for credit and the meeting you need to feel in control. Have clear objectives.
Most of us have probably been used to borrowing on Base+ % margin; nowadays it's common for banks to go down the LIBOR+ % margin. That is a better measure of their 'cost of funds'.
Banks will also ask you to buy additional products. These will encourage them to look at your proposition more favourably, but be wary if they are made a condition of the lending.
Demonstrate your business controls how you monitor sales on a weekly basis, as well as margins and shrinkage.
Engage the services of an independent financial advisor if necessary. Make sure they have experience of business finance. Banks will welcome their presence if it is a constructive one.
Maintain contact with other banks on a regular basis to see what they can offer. Isn't it always the case that new customers get a better deal than existing customers? Knowing what is available elsewhere can make you a more confident negotiator.
This might help end the heartbreak.
Kishor’s top tips
1) Understand your credit options: fixed loans, overdrafts and so on clearly
2) Prepare a concise business plan
3) Learn the lending terminology
4) Understand your accounts, competition and marketplace
5) Be prepared to negotiate interest charges, capital repayments and holidays
How important are seasonal promotions to you?
Very important: 72%
Quite important: 15%
Limited significance: 12%
Not at all important: 1%
How important are events-linked promotions?
Very important: 48%
Limited significance: 33%
Quite important: 14%
Very important: 5%
What sales uplift on promotional lines did you see during the World Cup fortnight?
I did not see any: 31%
Suppliers need to provide more in-store merchandising advice around promotions
Strongly disagree: 80%
Strongly agree: 20%
Have you given any thought to promotional activity for London 2012?
New in my Store
Name: Darren MacDonald
Name of store: Bishop Retail
Location: Nine stores across County Durham
Type of store: C-store forecourt stores
Main suppliers: P&H
How often do you get new products in? Main deliveries are twice a week.
What have you started stocking recently? The new meat range from Jon Thorners, which is West Country products made from local meat suppliers.
How did you find out about them? We were looking for quality meat and this was introduced to us through the P&H pro retail event.
Is any one product selling particularly well? The quarter-pounders and chicken fillets are selling best. Customers are willing to pay slightly more to not have to wade through a huge supermarket, but value is still important. We introduced the range about two months ago and the sales are building weekly.
Is any product selling particularly badly? Some are more successful than others, but this is a long-term investment. The worst thing any retailer can do is introduce a range and then remove it after one or two months without really trying to make it work.
Have you delisted any products recently? We have had a huge rationalisation of our wines. With 90% of sales coming from 20 SKUs and promotional offers it was a no-brainer to reduce our range.
Are there any products you've got your eye on? More fresh produce. The plan is for the stores to have a 40/60 split on fresh to ambient within 12 months.
Propertyof the week
What: General store and delicatessen
Where: Rock, Cornwall
How much: Offers in region of £950,000
The sale of Di's Dairy and Pantry offers a chance to buy a successful business in a popular holiday destination. The business is at the heart of the Cornish village of Rock and boasts 1,300sq ft of shop space, refurbished owner's accommodation with two spacious bedrooms and a forecourt with customer parking.
Offers in the region of £950,000 are sought for the freehold of this two-storey, detached property.
Generating an annual turnover of £600,000, the store sells fine wines and more than 100 cheeses.
For further information please contact Paul Heather of Christie + Co on 01392 285604.