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Getting Started

The bespoke approach to borrowing

How private banking can help throughout the business cycle

The bespoke approach to borrowing

From inception through to expansion, running a business entails consistent funding for a variety of reasons, which means loans can be critical to an entrepreneur’s success. Beyond their own operations, business owners may also be looking to fund other aspects of their lifestyles, such as purchasing their own dream property.

Yet, despite small businesses accounting for 99.3% of all private sector businesses in the UK at the start of 2018 – with 99.9% small or medium-sized (SMEs) – entrepreneurs continue to face difficulty in accessing funds.  (Source: Department for Business, Energy & Industrial Strategy’s Business Population Estimates 2018).

The reality, however, is that many entrepreneurs fail to look beyond high-street banks when attempting to secure a loan. The process of approaching these banks can be a daunting one, with many reluctant to lend to entrepreneurs due to their rigid assessment criteria. But there are ways to overcome the barriers to finance presented by traditional bank loans.

Private banking offers one such alternative: a bespoke approach to lending that takes into consideration the individual and their personal financial situation. What’s more, busy professionals can benefit greatly from a private bank relationship, which is renowned for its personal touch and appeals to those who prefer finance with a face to it, rather than a ‘computer says no’ mentality.

Here, we look at how private bank lending compares to traditional bank lending at three stages of the business cycle.


Getting started

Getting a business off the ground takes determination and drive, but this alone does not guarantee funding from lenders.

Following a record year in 2017, total investment in UK startup companies dropped 15 per cent from £8.27 billion to £7 billion in 2018, according to figures published by Beauhurst (Feb, 2019), a searchable database of the UK's high-growth companies. Today, start-up loans for new businesses remain highly sought after.

It’s no surprise then that many business owners cite a lack of finance as one of the biggest barriers to pursuing their entrepreneurial ventures, with most relying on the founder’s savings, investment, gifts from friends and family, government grants or even crowdfunding as traditional routes to funding dry-up.

One major difference between a private bank and a traditional funder is flexibility, with the former taking a more varied approach to credit assessment based on their own method to measuring creditworthiness. A private bank can be flexible regarding requirements and solutions by looking at the bigger picture rather than relying on the rigidity of credit scoring.

For example, private banks will recognise that many entrepreneurs may be on their second or third business and have had one or more successful ventures previously. They may have a need to borrow for a new start-up or have wealth tied up in other investments, and therefore have a need to borrow. This kind of tailored approach is built on the strong interpersonal client relationships that a private bank affords.


Early-stage growth

One of the biggest challenges for entrepreneurs during the early growth stage of their business is having the time to meet a whole new range of demands that come with managing an increasing client base, expanding a workforce and generating an increasing level of revenue.

The process of applying for funds with traditional banks can be slow, however, greatly affecting how quickly an entrepreneur can grow their company. In addition, traditional funders may still be reluctant to lend when there is not already a long track record of profitability. 

According to the Federation of Small Businesses (FSB), most start-ups are unlikely to break-even until their second or third year, making them unattractive to many high-street banks. The FSB went on to report in its 2018 Small Business Index (SBI) that 42% of small business owners said credit availability is very poor (19%) or quite poor (23%). Just 24% feel credit is readily available.

Private banks are more likely to consider the individual and lend based on wealth, not just income. A common factor that a traditional bank may overlook is that, while entrepreneurs may not pay a big income to themselves in their current entrepreneurial ventures, they could be wealthy individuals. Many entrepreneurs who fall short of the rigid demands of mainstream lenders may be able to reach their next objective with a private bank.


Expansion and maximising profits

Before a business can reach its full maturity, it needs to go through a stage of growth and expansion. A conundrum many small businesses face, however, is how to fund the expansion of their operations without access to financial backing when they find their resources and time stretched thinner than ever before.

Once upon a time, a sound business plan and a solid track record were enough to secure a loan but now, often nothing short of an already-thriving turnover can convince most banks to lend significant sums during this stage.

Whereas traditional banks tend to measure a client's ability to pay based on their income at the time of applying, private banks are more likely to take a longer-term view, factoring in the money a venture is going to make as well as the assets that currently back it.

Ultimately, this tailored and informed approach all comes down to the individual and what they are trying to achieve. When life has been a successful one, and the next milestone is in sight, a private bank’s bespoke approach to lending can help make entrepreneurs’ dreams a reality.

The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.

This article has been provided courtesy of Weatherbys Private Bank.