When the banking crisis hit three years ago high-street banks made a hasty retreat from lending to businesses, forcing forecourt retailers to look at their funding options from a different angle.

According to the latest figures from the Bank of England, lending to small businesses has been falling for nearly three years. In February it was 3.9% lower compared with 2011, when it was in turn lower than in February 2010. And to make matters worse, the interest rate being charged by the banks has jumped to the highest level since the Bank of England cut the base rate to a historic low of 0.5% in March 2009, the new figures reveal.

Adam Wadlow, partner at Barber Wadlow, says traditional lenders have significantly increased their loan-to-value ratios, as well as arrangement fees and cost of finance, making many deals from the high-street banks financially unattractive for retailers.

"Retailers are therefore having to look at alternative funding solutions, some of which is coming from private equity parties," he says. "But such private equity investors tend to require relatively large-scale investment opportunities even a £10m-£20m business would not be considered particularly big and therefore not worthwhile in getting involved with. Given that ownership in the independent petrol retailing sector is so fragmented, this is a major barrier to entry for private equity investors into the forecourt retailing sector."

One example of private equity investment into the forecourt sector, which previously may have been carried out by the traditional lenders, is Patron Capital’s acquisition of Top 50 indie Motor Fuel Group (MFG). The investor, which focuses on property-backed investments, acquired the business in a joint venture with the new management team backed by oil industry veteran Alasdair Locke. Patron provided the majority of the equity for the transaction alongside Alasdair Locke and members of the management team, while debt finance was provided by Investec Growth & Acquisition Finance, part of Investec Bank.

For the smaller independent retailers, securing funding can be difficult. "It is not just a case of having sufficient capital to meet the bank’s lower loan-to-value ratios, but there is a need to clearly demonstrate serviceability of the loan," says Wadlow. "Added to which, lenders are very focused upon the quality of the management team."

David Grant, head of UK business mortgages at Christie Finance, agrees that the key to securing funding lies in the strength of the operator. "If you have a good operator and a well-presented proposal you will get funding," he says. "Historically, as long as the business was making a bit of money the bank would have lent, but now they are looking for profits to be one-and-a-half to two times the cost of the loan that’s a more recent feature. The repayability factor was not as stringent in the past. It’s a bit more tight now so only good operators producing those types of profits are getting loans approved. Most of the deals coming through for forecourts are 60-65% loan-to-business-value ratio over a 10-15-year mortgage term.

"Businesses must make sure their trading accounts are bang up to date," Grant also advises.

The banks have been known to pull the plug on a business with little warning, though. And it’s not just smaller businesses at risk. Top 50 Indie Calanike Retailing, which operates 19 sites in Scotland, suffered this fate in January when Allied Irish Bank (AIB) decided to place the company in receivership while simultaneously putting director Kenny Webster’s drinks business Sangs into administration.

At the time, a shocked Kenny said: "Allied Irish decided to put Sangs into administration with almost immediate effect, giving us no opportunity to discuss it, or find an alternative solution. That would be shocking enough but given that Sangs is in profit, in growth, with no cash flow issues and has never defaulted on a loan or supplier payment, I am at a loss to understand why they’ve done it."

AIB also used a cross-guarantee to put Calanike in receivership. "Previous to this, they had never once discussed the health of the company with us. This is a company that has net assets valued at almost £5m, an excellent credit rating and, in our last financial year, profit before tax of £192,000," said Kenny.

Christie Finance’s David Grant says: "Sometimes the banks’ decisions defy logic and they don’t see the bigger picture. That can often be catastrophic for the smaller operator. Some banks are much more concerned about their own interest than the business itself."

While the high street banks have been shying away from lending to small businesses since the financial crisis hit, Grant says some have been coming back into the market in the past couple of months. "We are beginning to notice increased activity from the high street lenders so we are quite encouraged by that at this moment in time," he says. "The last Budget has something to do with it with the implementation of the National Loan Guarantee Scheme (NLGS) certainly helping."

The government’s NLGS has been launched to help smaller businesses with an annual group turnover of up to £50m access cheaper finance. It is using the UK’s budget credibility in financial markets to provide up to £20bn of government guarantees on unsecured borrowing by banks, enabling them to borrow at a cheaper rate.

Around £5bn in guarantees will be made available in the first tranche.

Participating banks will pass on the entire benefit that they receive from the guarantees to smaller businesses across the UK through cheaper loans.

Businesses that take out an NLGS loan will receive a discount of one percentage point compared to the interest rate that they would otherwise have received from that bank outside the scheme. The banks currently participating in the scheme are Barclays, Santander, Lloyds and RBS. Aldermore has also agreed, in principle, to join the scheme.

Sale and lease-back is also proving to be a popular method of raising some cash. Adam Wadlow says the advantage of sale and lease-back for a retailer is that they are able to take on a new site without the need for substantial capital, which can then be redeployed elsewhere within the business. "We are certainly seeing an increase in leasehold transactions for this reason, particularly given the difficulty in securing capital for property acquisitions," he says.

"In the independent dealer sector, however, sale and lease-back is only really an option for a handful of the larger independent retailers because they are the only companies with sufficient financial strength in which to attract suitable investors at appropriate yields."

Wadlow adds that there’s an increasing number of leasehold transactions as a result of supermarkets entering the market. "Supermarkets are a lot more used to taking leases to avoid the unnecessary locking-up of capital." He adds that this increased demand for leases is reflected in rental values.

keep talking

Businesses can improve relationships with their bank by maintaining an open dialogue, according to Santander Corporate Banking, which offers RMI Petrol members preferential rates for business banking.

Marcelino Castrillo Garcia, head of SME at Santander UK, says: "We pride ourselves on our relationship approach to banking, and we believe it is imperative for businesses to be in regular contact with their relationship director. We encourage an upfront relationship, as we need businesses to be open with us and tell us when they are experiencing problems and let us know what we can do to help."

The bank, which works with around 100 forecourt retailers, says a good relationship will help businesses looking for funding. "An open and transparent relationship is key, however the usual requirements will always apply a good business plan and solid cash flow forecasts, which demonstrate an ability to repay," says Garcia. "However, we understand that good businesses depend on good leaders, so showing your relationship director your passion for your business speaks volumes, compared to facts and figures alone."

Should a business be refused funding, Garcia says it is possible to appeal. "All banks have an appeals process and this should be the first port of call. However, bank funding will not always be appropriate for every business. Alternative sources of finance can be found on the Better Business Finance website (www.betterbusinessfinance.co.uk)."