Pre-credit crisis, the banking market was a cosy, relationship-led high street bank market with four or five local players, and businesses knew where they stood. Now the environment has been transformed. If you’re a business that someone likes, there’s a daunting menu of providers available to you. Peer-to-peer (P2P) lending is growing in importance for SMEs, banks are still highly relevant, and private debt funds have proliferated over the past five years. On the capital markets side, businesses can move from private placements, to mini bonds, to retail bonds, to high yield bonds.
Yet the old virtues of relationship-based banking have not disappeared, and seeking a full service bank who can both help a business navigate the environment and provide capital has a number of advantages. Why?
First, although there is currently a wall of liquidity, it is vital to understand what each financial provider is looking for when assessing a business for funding. Bank lending, for example, is typically more relationship-focused and looking for companies seeking sustainable debt levels at a cheaper cost. Debt funds generally only look at businesses willing to pay mid to high single digit returns or greater. Each source of finance will have its advantages and disadvantages in terms of its flexibility and risk for the borrower, and the services of a bank that can offer guidance around this will enable a company to select the provider and source that will best fit its stage of development and plans. This is even more important in today’s more dynamic pricing environment.
Second, a bank can assist in maximising deliverability, by guiding management through the process and making sure that their business has provided the right information to enable the provider to make a quick decision. Management teams can get crowded out in raising finance when they also have a business to run, and a relationship-based bank who understands your sector will be better able to ensure the transaction is completed successfully and quickly.
Finally, there are benefits to developing a long-term relationship with a bank that will take a more personalised approach. On the one hand, it means the relationship is more likely to be treated as a partnership – with businesses backed because of their long-term potential and the quality of the management, rather than just because of a set of numbers. This can be a problem with more mono-line funding sources, like debt funds, where financial returns alone are the primary consideration.
On the other, it acknowledges that intangibles like the values of a business and a personal touch are integral to business relationships. Having someone who you can reach out to may be a bit old school, but it is important.