It is not in SMEs’ interests to wait until there is a pressing need for finance before deciding to track it down, yet that is often what they do, writes the NACFB’s Rob Lankey. Brokers are often approached by firms that cannot meet orders or demands because there is no redundancy or contingency planning
When a business owner meets a broker, the best opportunity to arrange an ideal financing option may have already passed, and this especially applies in the leasing sector.
Sometimes it is up to the broker to tell the borrower how much they are looking for, rather than the other way around. “What are your current needs?” is at least a straightforward question; “Where would you like to be in the future?” is more open-ended, more of a philosophical enquiry, and the sky is the limit.
We recently asked our members to comment on a new lender to the market, one that was looking to invest in businesses with minimum earnings before interest, taxes, depreciation and amortisation of £5m. Some members wondered aloud whether you could truly fit such businesses into the SME category – a question that sent us back to basics: What does a UK SME in 2017 actually look like?
If we go back to sections 382 and 465 of the Companies Act 2006, we read that a medium-sized company has a turnover of not more than £25.9m, a balance sheet total of not more than £12.9m, and no more than 250 employees. These are bigger figures than you might expect from the word ‘medium’.
Looking at values for a sample of the most recent 2,000 loan requests, the mean average value came to £88,220. Of these, 28 were for £1m or more, while 166 were for less than £5,000. Around a quarter of all SMEs which contacted us wanted to borrow less than £10,000; nearly half of all the leads were valued at £20,000 or below.
Of course the ideal loan size depends on the status of the borrower as much as anything, but there is a broad principle: If the loan is too small, then a broker will not want to get involved – look, for example, at the 134 small businesses who came to our members looking for loans of £3,000 or less. Of the 2,000 leads in our own sample, the mean average value of loans that we were able to see through to completion was just under £110,000.
That is larger than the mean value of the total of the enquiries, which tells us two things: Firstly, the larger the business loan required, the more vital the broker’s services. Secondly, borrowers who minimize the size of the loan – believing that large requests are more likely to be refused by the lender – may be heading in the wrong direction.
In fact, some loan requests that end up in the leasing and asset finance category are as much requests for advice as for money – small business owners wanting someone else to look around and spot what the next step should be.
Often they will not even be considering leasing an asset that they need, or in which they have already invested. So the broker’s role is regularly one of teacher as well as broker.