The number one reason banks give up on a business and appoint receivers is that they have lost faith in the future viability of the business. If they believe the business is heading somewhere positive, they naturally assume that they will get paid back. Without this hope the natural conclusion for the bank is to assume that the business will be unable to pay its debts and the bank is better off taking charge of their own destiny.
It is easy to overlook the fact that your bank is actually an investor in your business. They have made capital available to you to grow your business, just as your shareholders have. The only difference is that they want a lower risk for their investment and in return they have lower yield expectations than your shareholders. You need to assume that banks have an infinite number of choices for how they invest their capital to gain a return, and their choosing to invest in your business is firstly a privilege (there's no rule that says they have to), and secondly a compliment to you as they are willing to back your vision of the future and your ability to achieve it. However if they lose faith in this vision and your management ability, this is when they take action to get their money back.
So lets break this down a little further. For a bank to believe in the future there need to be some key ingredients:
1) The future needs to be exciting - a business planning to just get by in an ordinary market is not exciting. Your business needs to have a value proposition that more people want than the business can afford to service. The business needs to recognise and convey to the bank the ins and outs of the market place, and it needs to demonstrate that it has a plan to perform well in this market. Most of all, the business needs to be able to demonstrate in a forecast that it can not only pay its interest and reduce its debt in line with its commitment, but that there is plenty of money left over!
2) The future needs to be realistic - Entrepreneurs are great at thinking big, but bankers aren't. Bankers are well and truely tied to the ground (you would be too if you had to deal with credit all day!!). A bit of long term exciting BHAG work is great, but the next 12 months needs to be tied to realism. If you didn't do it last year, why do you think you'll do it this year! This is the question you need to be able to answer with some conviction. It is alright to say that you didn't think of it and that's why it hasn't been done, but then you need to be able to justify that it can be done. Actual sales contracts, market research, Heads of Agreement. These are things that are going to de-risk a future for the bank and give confidence that the future vision is achievable. Without this sort of justification your future risks looking more fiction than fact.
3) Show me the money - You need to continually furnish your bank with a "3-way" forecast. This means Balance Sheet, Profit and Loss, and Cash Flow Forecast. You need to show in this that your revenue expectations are realistic, your costs are similar (or better) to last year unless you can justify specifically what will change and your working capital management makes sense. This means that you will be managing your debtors, inventory and creditors to ensure that your cash levels improve. Finally your cash flow forecast and balance sheet need to show the bank very clearly what you need from them, and that you are going to meet your commitment to them. You will have sufficient funds to meet your interest expenses, you will stay within your account limits, and you will make your principal reductions. If you need capital investment for your growth plans (ie new machinery, vehicles, larger stock levels) then you also need to show how you plan to pay for this.
4) Get it right, first time! - The bank needs to be able to believe that Management is on top of their game and worth investing in. Each time you get your forecast wrong, you risk the banking losing heart in the ability of your management skills. Only put things in your plans that you know will happen, and think worst case. If you think worst case and you still come up with a great result, then the bank has nothing to worry about! However if your worst case opens up potential for the bank to have a problem, then you need to raise this with the bank now. Don't hide from it. Identify the risks and help the bank get comfortable that the risks are being managed.
It is very hard to convince a bank that you are a good bet, once they have lost faith in your ability to manage their money. Regular Forecasting and Business Planning will help the bank take comfort in this regard. If you're not good at forecasting, get your Accountant to help. Banks prefer Accountant prepared forecasts anyway. For some other tips on forecasting, check out the Pearl Financial Services website where we have put together a free checklist that businesses can use. There is no cost to join up and the information will help you focus on becoming a better bank customer.
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