Nick Gardner exposes an underbelly of bank disinterest in small business lending in his article published on Sunday.
Reading through it he shines quite an inflammatory torch on the banks with quotes from various folks citing catastrophic business consequence. Whilst not all businesses would be suffering quite as portrayed, there are probably thousands of businesses out there that are. From a shareholder's perspective, banks are not charities and they need to manage the very finite capital resources that they have to ensure maximum return. However this doesn't help businesses suffering under the bank disinterest shadow.
I have to also say that my bum twitches at the thought that new global banking parameters handed down in Basel will likely further turn banks away from small business as the relative differential between the capital required for business lending and mortgages increases again. However banks have got much better in recent times at justifying (at least to themselves) price increases to compensate for this which probably just means that those businesses that need to borrow, will be able to, however they need to expect to pay considerably more!
here are some things that businesses need to consider when managing their bank relationship going forward.....
1) Reduce your risk perception
Businesses need to become much smarter at managing the risk messages that they are conveying to the bank. Obviously, the lower risk you are, the lower your pricing will be and the more attractive you will be to banks.
This is about managing your trading accounts, paying your loans on time, operating within your covenants and budgeting conservatively (for the bank).
Pearl Finance have a Risk Grade Assessment service that can help you to understand what you are doing wrong.
2) Give comfort about the future, justified by the past
The number 1 reason why a bank will foreclose on a business is because they have lost confidence in the business' ability to trade its way out of trouble. If you want to have an unsupportive bank, then do yourself a favour and keep them in the dark about your plans for greatness.
If you don't have plans, then you need to ask yourself "would I invest in my own business" and then detail on paper why. But remember that banks are cynical bastards. If your enthusiasm is based on pipe dreams and ideal world scenarios then you are portraying yourself as a gambler, not a business person. Leave the low probability get rich moments to your horse racing pursuits! Your plans need to be 85% certain of coming off (ie sales contracts in place or evidence that you have done it multiple times before) otherwise you are kidding yourself.
Check out the forecasting checklist attached (you need to sign in but there is not cost and you won't be hassled by ongoing communications unless you elect to be)
3) Tell your bank what you need and why
Always spell out for your bank what you want from them. The average banker is taught to be an order taker, ie you ask for something and then I'll choose whether the answer is yes or no. If you don't put propositions to them in this black and white format, they will find it difficult to respond.
4) Identify the risks in your business for them
If you tell the bank what is wrong with your business, you reduce the need for them to think about this as hard themselves. Having aired your dirty laundry however, you then need to take the time to explain to the banker why they shouldn't be worried about the things identified. This does 2 things - it shows that you are a smart business person employing sensible risk management practices in your business (remember they are in the risk management business too so they will love this!) and bottom line - you are managing the risks inside your business, something most businesses never take the time to do!
5) Have a Bank trusted intermediary on your team
Don't underestimate the value that a bank, who is doubtful about you and your business, will place on you then appointing someone that they trust to advise your business. All of a sudden, the bank believes that they are getting the full picture and they can stop guessing what is really going on behind closed doors. The bank can also gain confidence that the business is working with the bank's interests in mind - they love this.
Who are the intermediaries? I'm not sure that your Accountant is enough. They might be bound by professional codes of conduct, but they aren't bankers and, though there are plenty of exceptions to this, they don't necessarily know what a bank wants and thinks.
Insolvency Accountants have very close relationships with the banks (banks are their best source of new business). However, again as a generalisation, insolvency Accountants have a vested interest in you falling over as they are then the most likely candidate to take you over. Also, they are not always good at trading businesses as they cost too much to spend the time needed. Their forte is selling businesses and business bits. Unless this is your most likely resolution then you might want to think twice.
Experienced bankers are your best bet in my heavily biased opinion! We bankers understand the concerns of the bank. We know the issues that will be concerning them and we know what the business needs to look like to alleviate concern. We are not widget experts however - ie we can help you plan what needs to be done to get you out of the pickle, but you will be left to drive this. This keeps the costs down.
Happy to chat this through with you if you are having some issues. Simply leave a comment below of alternatively contact me at Pearl Financial Services, leave some basic details and I'll give you a call.....
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