Banks and How to Survive Them

Synopsis:

Love them or hate them, every business needs them!  But, in these current difficult economic conditions, what can a business do to keep its bank on their side?  Here are ten top tips from someone whose business it is to source commercial finance!

Main Article:

In the court of public opinion, the Banks are guilty of causing the credit crunch and the international recession that followed it.  This makes the current debate about banker’s bonuses all the harder to swallow as they seem to be getting back to business as usual whilst the rest of us are left to clean up the mess and suffer the hardship and heartache that goes with it.

But there is no escaping the fact that all of us who are in business need our banks and we need them to work with us and not against us.  So putting all recriminations aside, for the purposes of this article at least, let us look at how best to manage our banking relationship in the current climate.

Top Ten Tips

1:  Communicate!

Us blokes pride ourselves on not visiting the doctor unless we are at deaths door.  We can, quite literally, go for years without seeing our doctor and then, when we do see him, we have a list of complaints and niggles we want to go through with him.  To a large extent, we treat our bank managers just the same – and they don’t’ like it!

There is nothing a bank manager hates more than a business owner they haven’t seen for ages bowling in and telling them they are in difficulty and desperately need more funding by next Wednesday at the latest!

On the other hand, business owners are often reluctant to give a bank too much information as they are suspicious that, by doing so, they may find their facilities reduced and not increased.  To an extent, the banks reap what they sow.

However, even with all of this in mind, we are far more likely to get a sympathetic response if we have made the effort to keep the bank informed about our business progress.  We all have to view the relationship as a partnership, not a tug of war!

2:  Clearly Make Your Case!

As a Commercial Finance Broker, I am often amazed at how imprecise a client can be in telling you exactly what they need.  You often get statements like “a few grand should do it” or “I think I’m going to need about …” or the classic “you tell me how much you can raise and I’ll go with that!”  It is also often very unclear as to what the funds are to be used for.

This sort of approach is not going to impress a bank manager.  You need to make your case professionally and you need to be able to account for how much money you need and what the funds will be used for.  They will ask you questions and they will expect you to know your stuff.  Not quite as intimidating as facing the Dragons in BBC’s Dragons Den but exactly the same questions and concerns will need to be answered.

Be prepared.  Take accounts and projections with you.  If needs be consider doing a business plan.  There may even be grant support to help you do this.  If in any doubt, take advice before hand.  After all, “you never get a second chance to make a first impression!”

3:  Bankers Are People Too!   (No Really!!)

It is very easy to see the bank manager in front of you as a tool of the big bank machine and, to an extent, they are.  However, they are people and, just like the rest of us, they have their own agenda and this will have a significant impact upon how they deal with our application.

For example, they will have sales targets that they have to achieve so, you would think, they should be keen to write as much business as possible.  However, they tend to be conservative by nature and deals that go wrong will count against them.  So, in difficult economic times, it might have to be a good case just to get them to put their heads above the parapet!

All the more reason for making the best possible case we can.  Give them lots of information, properly presented.  All of this will give them the courage to fight for your case.

4:  Who Are You Dealing With?

Where does the manager you are dealing with fit in within the bank’s structure?  Most banks now have a business development team and a team of “relationship managers.”  By nature, the former are going to be more enthusiastic in their efforts to put on new business whereas the latter may see themselves, in part at least, as gate keepers.

It may not be as clear cut as that.  Banks are prone to move managers.  Often, a new manager coming into an area is given specific instructions on the task in front of them.  In difficult times, this may be to reduce the bank’s exposure in certain sectors or to tighten up across the board.

There are also specialist departments that you can find yourself referred into.  The most arduous of these is the exit department.  Of course they tend not to call these departments or managers this.  Their names range from the honest Critical Care, to the disingenuous “Specialised Lending.”  

Even still, all is not necessarily lost if you find yourself in such a position.  Rarely are they simply the executioner.  Their first task is to assess the business and judge whether, with tight management, it has a chance of going back into “good bank.”  If so, they will give you some measure of support and some time to turn the business around.  If not, they will encourage you to refinance and will make your life increasingly difficult until you do so.  Sadly, in some cases, they will pull the plug!

Finally, are you dealing with the decision maker?  This is probably unlikely as most bank manages don’t have the “discretion” any more.  So, they will be putting the case to and underwriter who will ultimately make the decision.

As you can see, it is very important to know who you are dealing with.  If it happens to be the exit team, you should take urgent advice!

5:  Understand the Nature of the Beast!

This is really building on the last two points.  Bankers tend to view the world in their own specific way.  From a financial perspective they are undoubtedly correct.  However, this may still be different from a “commercial” viewpoint.  

Let me illustrate.  You have gone out and won some significant new business.  After the initial euphoria you do the figures and realise that you are going to need some additional funding in order to deliver the business.  Its good news, it’s nailed on, how could the bank fail to support you?  But the bank manager doesn’t see it quite like that.  He’s worried about “over trading” – that is the business growing faster than its ability to fund itself.

Another example.  We feel a loyalty to our banks.  Often they are the first port of call when we need any form of finance.  I have seen many cases where the business is funded in its entirety with a bank and the owners  have their mortgage, credit cards, car finance, overdraft, etc, all with the same bank – “been with them since I left school.”  Whilst the banks do appreciate our loyalty, there can reach a point where this becomes a concern for them.  They can feel over exposed to you – if your business failed would you be able to service your personal borrowing and pay back the business borrowing?  In banker speak, this is termed “aggregation”.

It’s not that one viewpoint is right and the other is wrong, it’s just a different perspective.

6:  Spread Your Risk!

Taking the last example to heart, most businesses would be well advised to consider spreading their risk by diversifying their borrowing.  After all, if you were buying a new vehicle or a piece of equipment, you would shop around but if it’s a finance product you don’t?

The net effect of this exercise may well be to reduce your overall cost of funds, you may well also increase the overall size of your facilities, but the rationale for doing it should be to manage your exposure to any single lender.  When you have all of your eggs in one basket, the lender holds all the cards and has the whip hand in any negotiation – to mix my metaphors!

If you are going to look at refinancing to spread your risk, you would be well advised to talk to a commercial finance broker or take other professional advice.  They should have options available that you wouldn’t necessarily know about.

7:  Move Hardcore Borrowing!

Developing the last point a little further.  Where a business has been funded by overdraft for a long time, they often reach the position where the overdraft never reduces beyond a certain point from month to month.  This can be termed “hardcore” borrowing and should, where possible, be funded by a longer term product rather than a short term overdraft facility.  Remember, an overdraft is repayable on demand and, whilst the bank is unlikely to call in your overdraft, they can reduce it if they feel the need to.

The longer term product may be a commercial mortgage or a business loan, depending upon what assets the business has.  Another advantage of this sort of move is that the loan or mortgage will be on a repayment basis so the business should see its overall borrowing reduce over time.

Moving hardcore borrowing will also improve the bank’s overall view of your business.

8:  Put You Own House In Order!

We have discussed presenting the best case to the bank.  However, it is also imperative to show that your business is well run and any challenges facing it are being dealt with.  In the current climate the most obvious thing is to demonstrate that your costs are under control.  If your costs are increasing and you are seeking to increase your facilities, this will be an obvious red flag for any bank manager.

Your accounts are a window onto your business and there are a number of indicators that give a good insight as to the health and efficiency of the business.  We can’t go into these within the context of this article but you should look at trends in sales, profitability and liquidity.  Bank managers will also be unsympathetic if your salary/drawings/dividends are disproportionately high or if you have, what they might consider, ostentatious spending.    I had a good example of this with a client recently.  He had a worthy business plan but, against my advice, it included the prevision of a brand new special edition 4 by 4 vehicle for himself.  It was brought up by the lender we were presenting to and, whilst it might not have been the only reason, the proposal was declined.

9:  Know Your Credit Status!

Whether you know it or not, there is an enormous amount of information out there about you and your business.  This information can be accessed by your customers and suppliers as well as used routinely by banks and other lenders.  So, it is a good idea to find out how the outside world views you!

Information about your personal credit is, by law, available to you for a small administration fee – it is not necessary to sign up for an expensive service.  I will provide another article covering this in detail in a future issue of this newsletter.  If you want more details before then contact me or search for Experian or Equifax, the 2 most widely used agencies.

Company searches are also available from a number of different agencies.  They provide accounting information as well as details of directors and shareholders and even details of the charges lenders have on your company.   As a one off special offer, I will provide a free copy of your company search to any reader of this newsletter.

When raising finance, or in any form of negotiation with your bank, it is very helpful to have this information before hand.  It allows you to disclose any adverse history and to provide explanation or mitigation up front.  This will not necessarily guarantee you a positive decision but it will mean you get a fair hearing.

10:  Get Advice!

With so much to think about, and with the stakes being higher than ever, you would be well advised to get a professional in to help you.  This could be a commercial finance broker (but I would say that wouldn’t I!), an accountant or a financial consultant.  When choosing, make sure that they have experience with the full gambit of commercial finance products as simply going to the next bank down the road won’t necessarily be successful or mean that the grass is any greener when you get there.

Find out what the cost of their support is going to be up front.  Be careful if there are upfront fees.  Try and use someone whose fees are related to or dependent upon success.  Ask if they have access to any grant support that you may be able to tap into.

Above all, when you have decided who you are going to work with, tell them everything.  There is nothing worse than getting the case near to fruition only to find that some skeleton comes out of the closet to scupper the deal.  You need to know exactly where you stand and what options are realistically open to you so that you can make the best informed decisions.  This can only be done if you provide all of the information required.

 

Finally, and above all, don’t burry your head in the sand!  If you have issues with the financing of your business, deal with them.  If you don’t, they won’t go away and you may find that you have fewer options open to you when you do come to deal with it.

 

Author Details:

Stephen Hare is the principle at ICAN Finance and has worked as a Commercial Finance Broker for more than 16 years.  As well as managing a busy caseload, he has recently presented at Business Link seminars on Financing Start Up Businesses and Preparing For The Upturn.  ICAN Finance is a member of the National Association of Commercial Finance Brokers (NACFB) and works to their nationally recognised code of practice.

www.icanfinance.co.uk  :  help@icanfinance.co.uk  :  0845 456 8 999.