Raising finance – the disadvantages of a ‘DIY’ approach

Some businesses adopt a ‘DIY’ approach to raising finance, and without realising, put themselves at a disadvantage. Here are five reasons why the DIY route is not necessarily the best option.

A good track record is not enough – Too many borrowers assume that their relationship with their Manager, or their track record with the bank, is sufficient to obtain finance on fair and competitive terms. This is a mistake and you must never assume that banks make decisions on a purely ‘relationship’ basis – banks value most the businesses that they make the most money from, at the lowest risk. Do not assume either that a Lending Manager will always have your best interests solely at heart: always remember that, ultimately, their loyalty is with their employer – the bank. Another thing to remember is that Lending Managers invariably have personal targets to meet and sometimes it is how close they are to meeting those targets that will influence the terms they offer, rather than their relationship with a customer or the strength of the customer’s proposal. This is just human nature.

Borrowers rarely have enough time to spare – businesses have many ‘moving parts’ and therefore banks need to see and analyse a lot of information in order to understand them properly. Providing all this information and explaining it can be very time consuming for borrowers and discourages them from exploring the market. This is unfortunate because, like any business, a bank is very unlikely to offer its best terms unless there is a degree of competitive pressure on it.

Business lending is very technical – so negotiations with banks can be very one-sided. How can you know whether the terms offered to you are appropriate, or whether there is a fair balance of risk between you (for example in respect of personal guarantees) and the lender? As the saying goes, when you are dealing with something that is not your area of expertise, “You don’t know what you don’t know!”

Banks’ decision-making is very opaque – it happens behind closed doors. You cannot participate in the discussions between your Manager and the bank’s Credit Manager. Nor are you able to see the bank’s internal correspondence, so you have no way of knowing what information the bank used, nor how it assessed your business and the proposal. Without this insight, you can never be sure how the bank arrived at its decision, which could lead to problems at a later date.

Business lending is not like consumer lending – no two businesses are alike, so there are no standard terms and no set price list – most things are negotiable. Despite this, most businesses have no reliable way of knowing whether the terms offered are competitive or not.