Relationship-based lending is expected to come to the fore over the next three to five years, as local banks adapt to new international regulations designed to push up the price of credit.
Professor Ian Harper, partner at Deloitte Access Economic, says small business needs to prepare for banks being more discerning and expensive in their SME lending.
Harper, a member of the Wallis Inquiry into the financial system in the 1990s, says SMEs are likely to be disproportionately hit by the Basel regulations, due to their riskier status and larger organisations’ ability to access the bond market.
He advises small business to seek out better relationships with their lender to insulate themselves against tougher credit conditions in the future.
“We’ll see the return – and this is not altogether a bad thing – to relationship lending within the bank system,” Harper told SmartCompany this morning.
Harper says after decades of investment banking gaining the ascendancy, traditional banking is coming to fore – requiring a shift in thinking for not only clients but bankers.
He says small business needs to relearn the lessons of the past 40 years about how to deal with banks.
With banks needing to tighten their lending criteria and improve risk assessments, Harper urges SMEs to recognise their riskier status and be prepared to back up their applications with deeper relationships.
“It will take us back to a system where the banks will need to build a relationship with you, and vice versa; to have a clearer sense of your business plan and your aptitude for business,” he says.
“This is fine if you’ve got a good story to tell and prepared to build a relationship to the bank, show greater loyalty, allow them to understand more and not treat it like a transactional engagement with the bank.
“My advice for small business is get a relationship with your bank, work at it, go and see the bank manager – all of that will be important.
“The more accumulated knowledge they have of your business, the more likely they can lend you what you need and stick by you when it gets tough.”