A recent article in the Daily Mail suggested that small businesses are hoarding cash because they fear overdrafts could be slashed at any moment.
However, isn’t it more likely to be the issue of personal security – business owners are just not interested in offering personal security for what in many instances are relatively modest sums of money, required on an intermittent and short term basis.
What are overdrafts and loans for?
You get the impression that the banks are trying to re-establish the principle that overdrafts are essentially for managing cash flow and that loans are for working capital. This distinction was blurred until recently due to the banks’ historic attitude to risk that has recently toughened, and the risks and time-scales are different in the two cases.
You need a good business plan
But, whether it is for an overdraft or a loan, a good business plan is required to present to the bank, but they are not the same plan – they have different objectives and time-scales to reflect the issue being addressed and the associated risks.
And you will probably be asked for personal security – that’s the rub!
And these days, the plan should include also considerations of personal security or other security as we know increasingly the banks are looking for that, on top of a good plan.
So that’s the rub – no matter how compelling is your business plan, and no matter what size of loan or overdraft your are looking for, you are likely to be asked for personal security or some other form of security to hedge the bank’s risk.
Banks should go back to taking some risk
But it is no surprise that business owners who already have a huge personal stake in their business, don’t want another charge on their own assets.
Business owners want the banks to go back to taking some risk at least for a small overdraft, if the business case is sound. And if the banks say they are doing that – you have to say that is not the impression given.
Posted by Peter Johnson, Business Advisor with SGBA. If you would to talk to someone about your business, or your business plan, call Peter on 07714 093406 or email him at email@example.com.