There appears to be a direct correlation between economic slumps and the howls of outrage that small business owners unleash on banks.
That may come as no surprise to entrepreneurs and other business owners who are experiencing vein-popping frustration in their quest for financing. For many businesses, that financing will mean the difference between life and death and, as such, this is no laughing matter.
“In our experience, the volume of complaints from small businesses tends to increase during and following economic downturns as businesses get financially stretched and banks take action to protect their interests,” said Douglas Melville, the head of the Ombudsman for Banking Services and Investments, an agency that got its start after the economic downturn of the early 1990s drew political attention to the challenges small businesses faced in their dealings with banks.
But despite the perception, the big banks do want small business customers.
“If you’re able to cater to that sector you can attract good commercial clients who can also become good, solid personal clients of the bank,” said Miguel Barrieras, head of business banking for HSBC Bank Canada. “With more and more self-employed people, it’s a new reality of the Canadian economy, and I think to be successful in banking you need to cater to that sector.”
Much of the tension between borrowers and banks in tough economic times stems from the reviews that banks conduct of their risk appetites and lending criteria. The rise in bankruptcies and layoffs that follow a recession mean that loan losses will rise, and so banks manage their portfolios in an effort to reduce their risk of losses.
“Certainly during the economic downturn everybody was more cautious,” Mr. Barrieras said.
Kevin Fraser, a partner in Grant Thornton LLP’s financial advisory practice in Halifax, said “banks have significantly increased the level of due diligence and the level of financial analysis they do with respect to any new accounts or new clients they bring in. In some cases the bar was higher, and continues to be higher today, to get some of that financing support than it would have been 18 to 24 months ago.”
The same is true for many consumers and large corporations. But small business owners frequently have the most frustrating experiences, and that’s because, in many cases, they are making mistakes in their quest for a loan, experts say.
“Some of these small business owners frankly don’t have the financial experience of business acumen that financial institutions may expect them to have,” Mr. Fraser said. “This is where we’re counselling a lot of our clients; it’s not the banks’ fault that some of these small business owners don’t have that knowledge or that experience. What it comes down to is a bit of a disconnect between the expectations of small business about the ability to get financing, and what the banks are expecting to receive to help them make a decision.”
It doesn’t hurt to go in and have an informal chat with a small business account manager at one of the banks before even beginning to seek financing, to get some advice and a sense of what they will be looking for, Mr. Fraser said.
One of the worst mistakes a business owner can make is simply walking into a bank and saying, “I need financing.”
“In many cases it really comes down to the small business owner demonstrating that they’ve thought beyond the next 30 days about where they’re taking the business,” Mr. Fraser said. That means having a business plan, solid financial information, and knowing exactly how much financing they need and why.
