The simple answer is that the pendulum will never stop, it will continue to swing from one side to the other.
People claim that the banks aren’t lending, and in the SME market there is evidence to that effect, but it is very simplistic to point a finger of damnation at the banks.

On the one hand they are told that they should be lending more and on the other they should be recapitalising their balance sheets and improve liquidity, and this during a time when banks still aren’t lending to each other. Not any easy job to do without a magic wand!

The problem stems from many of the banks historically providing quasi equity to businesses at secured funder rates. I was recently at the Cheltenham Literature Festival and had the pleasure of listening to Duncan Bannatyne talk about his life in business. What was apparent was that a serial equity investor should be looking for returns of up to (and beyond) 100% per annum on their successful investments. Yet high street banks were providing this type funding at 1.5; 2 and 3% over base rate. Often unsecured. The role of bank lender (funding working capital requirements and fixed asset acquisitions) had morphed into that of high risk equity finance. This was not their role and was quite clearly an unsustainable position.

The banks reaction during the ‘credit crunch’ was typically knee jerk and saw the metaphorical pendulum swing so far the other way that even relatively straight-forward lending proposals were viewed through very sceptical eyes. The level of information demanded was often draconian and added little in the way of value to any party.

Thankfully the pendulum appears to be moving a little back and we are seeing proposals being looked at sympathetically, although often on a far more structured footing. The demand for information remains high, but that’s not necessarily a bad thing. The lax lending days saw ill informed decisions being made and the current requirement for more comprehensive information simply reflects what should have been demanded to support a lending application 4 or 5 years ago. It will be a long time before we see the demand of detailed information begin to wane. The more robust the internal management information systems then the easier lending will be obtained. Ultimately this will be to the benefit of us all.

So where does that leave us in terms of equity funding? Well business owners will need to look a digging deep into their own pockets, or consider obtaining third party investment. This in itself will have ramifications with some business owners having neither the ability nor the inclination to make equity injections. Yes there maybe failures as a result of this, but there will also be opportunities and we are beginning to see an uplift in business valuation work; use of the Enterprise Investment Scheme (EIS); and corporate finance activity as those with capital to invest go on the acquisition trail and those without the capital/desire look at their own exit strategies.

Whichever side of the coin effects you make sure the basics are covered. Get early professional advice and make sure the implications of your plans and actions are clearly understood and are catered for from the outset. And for acquirers ensure that your due diligence is comprehensive.

Despite the ‘doom and gloom’ that the media loves to portray, there is cash ‘out there’ and the entrepreneurial spirit will usually succeed in finding it, no matter what the source.

John Barker is Business Development Manager and part of the Corporate Finance team @ Randall & Payne LLP.