Banking on the Bankers

I recently went to see a film at the cinema which had a scene in it that saw a person trapped in a burning cellar. If there was any chance of this person being saved it was dashed when she sent the paraffin lamp in her hand crashing to the floor, exciting to a frenzy the already hungry flames. And she was consumed.

We might like to have a go at the banks and the bankers - and the bonus culture has certainly fanned the flames of wrath even more efficiently than the paraffin lamp - but, at the end of the day, surely we need to keep our banks alive and well and supporting social enterprises and other small and medium sized businesses, right?

Bankers - who needs them?

Some people do argue though that we don’t need the banks. Luke Johnson of Capital Partners reflected recently that some people consider that taking on mortgages and overdrafts was like committing a mortal sin, but certainly he thought it unlikely that businesses could succeed in a serious way without some bank debt of one sort or another. I think this would apply even more to social enterprises compared to other businesses because SEs are not generally able to, for example, raise equity like normal share companies (there are often restrictions on membership eligibility and quite often with SEs coming out of the public sector the staff have been issued with £1 shares) and it might take some time to fund growth through retained profits.

Some businesses though are able to reduce substantially their reliance on banks. The FT highlighted the business of the Freitag brothers recently who set up their bag business from reusing truck tarpaulins and are keen to retain independence and avoid outside financing as far as possible; they have been very successful running on these business lines. They used savings to invest in an industrial sewing machine at the start and borrowed from their parents to fund expansion, but even they have resorted to the bank on certain occasions. They used loans to finance their land-mark store in Zurich and they have also used loans to help equip their new factory. The limited use of external finance has not impeded their growth either with sales increases of 20-25% a year, though profits have been more variable.

So Freitag do not like the idea of using banks, but do actually do it. This underpins a theme: businesses do need to keep these relationships open with banks and funders because they can be crucial to both survival and success. One business that seems to be even tighter on this issue than Freitag is The Peoples’ Supermarket in Hackney in London, where Kate Bull the chief executive has been quoted as saying that “we have no bank finance - not even an overdraft”. The business has recently launched a ‘Brick by Brick’ campaign whereby anybody can buy bricks for just £1 each in order to raise the £2.5m needed to expand the pilot store. Kate Bull commented: “we pay our staff fair wages, but nobody benefits excessively in cash terms. If you are a financial institution looking for a 10% return, that just doesn’t compute.”

Key Partners

At the end of the day the banks can be seen as one of your key partners. You need a combination of skill-sets in business and your partners are a crucial part of the patchwork that makes up your comfort blanket. In their recent Investor’s Guide, UBS reflected on the importance of people working together. They posed the question - what could Tenzing Norgay teach professionals? Well, it has been said that genius is 1% inspiration and 99% perspiration, but UBS thought that collaboration was also essential. Hillary and Norgay show how even the very talented need support if they are to achieve peak performance, and maybe this is how we should see the banks and other financial support.

There is a lot of evidence out there that collaboration makes for a better product or solution. We simply cannot do everything on our own. One of the most influential current thinkers on the world’s financial troubles is Ken Rogoff, a Harvard economics professor. He has been going to the World Economic Forum in Davos for the last ten years and his advice is much sought after. However, he does not work alone. He has co-authored with Carmen Reinhart the history of financial crises over the centuries in their book ‘This Time is Different’ and both men are associated with the idea that when a state’s debt exceed 90% of GDP, they will reduce the economic potential of the country. There have been many other important joint authorships and collaborations that have had profound impacts on financial and economic thinking.

Collaboration can ultimately impact on the bottom-line as well. Financial records are very important because any business needs to be able to withstand a financial analysis. However, in looking at records financial analysts will scrutinise any partnering, joint ventures and mergers and acquisitions because they can impact on the financials and credit ratings. So you need to get your partners right.

Cash is King

What matters to businesses varies with the type of business, the shape they are in and their context and circumstances so it is therefore difficult to just say what is most important to a business. However, top of most peoples’ lists is cash. Cash is king. If you listen to people like Richard Tierney of BDO talking about social enterprises winning new business you will begin to understand pretty quickly why cash is king. Businesses do not typically fail because they are not profitable, they fail because they run out of cash. Cash is crucial to survival. I took a call recently from an organisation who had unpaid invoices from a State that had Sovereign debt issues. Bills were just not being paid. Even though the organisation knew they would be paid at some stage, the level of debt was such that if it did not get some cash soon - despite being a profitable business - it could go under. Cash management has been highlighted recently with newly created SEs coming out of public bodies where there has been a significant amount of time spent on agreeing early payment dates with commissioners and managing the migration to standard contract requirements.

Putting Your Money Where your Mouth Is

Ultimately, a debate about banks and borrowing can be futile you cannot obtain funds when you need them. The picture on this remains mixed. The UK’s five main banks missed their target for lending to smaller businesses by more than £1bn, although they did exceed their overall target. There were gross loans of nearly £215bn against a target of £190bn, but only a figure close to £75bn was lent to smaller companies compared with the £76bn target. John Walker, Chairman of the Federation of Small Businesses commented that the failure to hit the target is “extremely disappointing” and urged the government to look at alternative sources of finance. At the end of the day as Mark Hoban, the Treasury Financial Secretary said, “ensuring that businesses can access the credit they need to grow and create jobs is vital, which is why the government is now making up to £21bn of guarantees available through credit easing. But banks need to play their part by continuing to support British business.”

Chris Brophy is a partner with Capsticks, specialising in commercial and contractual work for healthcare bodies, social enterprises, mutuals and charities.