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.
Tuesday, July 20, 2010
Thursday, July 15, 2010
Banks going to extreme lengths to retain customers
A lender that we deal with was recounting to us today that they have had 3 instances recently where a client has come to them after their existing bank has insisted that they leave. Our financier then assesses and approves a facility for them, generally a little more expensive that the client is paying the existing bank as their cost of funds is higher. The client has gone back to their bank to make arrangements to transfer their facilities and the existing bank has decided to make a counter offer, that is not only cheaper than our lender's offer, but also cheaper than the existing rates being paid!
In short, the bankers are realising that it is much harder to get new deals through credit so they are doing all they can to retain clients. What is perculiar is that these are clients that have been asked to leave!
In my article - Drive Bank Competition; Shop your Bank - I suggested that businesses would be well placed to threaten to leave their bank as banks will drop rates to keep you. Today's discussion just reinforces this.
In short, the bankers are realising that it is much harder to get new deals through credit so they are doing all they can to retain clients. What is perculiar is that these are clients that have been asked to leave!
In my article - Drive Bank Competition; Shop your Bank - I suggested that businesses would be well placed to threaten to leave their bank as banks will drop rates to keep you. Today's discussion just reinforces this.
Friday, July 9, 2010
Trade your business out of Asset Management
Asset Management, aka the Hospital Division, is the relationship management division of the bank where non performing customers are put. This can be because you have defaulted on your loan payment obligations, or it can be because you smell like you might default.
Banks sell the decision as being an opportunity for the business to gain a Business Banker with more time on their hands to spend helping the business through the immediate challenges, and sometimes this is true. They might even charge you for the "privilege" with an extra service fee.
However more often than not, this is a staging post for the bank to then devise a plan to recoup its money, either by pressuring the business to refinance, pressuring it to sell down assets, or, in worst case situations, appointing someone else to do this for them (ie a receiver/liquidator).
Asset Management bankers are a different breed. Generally speaking, they are very financially astute, and quite experienced. However their method of managing the relationship is different to other bankers:
- these guys don't want to get too close because they might one day need to cut your throat (metaphorically).
- They are much less focused on customer needs and much more focused on bank needs. They are not paid to retain your custom, they are paid to find the most appropriate way to secure the bank's funds. IT IS ALL ABOUT THE BANK!
- These bankers are much closer to the decision makers, ie the holders of credit discretions, so things can move much faster in this division.
Generally the business manager knows in their heart of hearts that transfer to this division is coming, but it naturally comes as a kick in the guts when it does. No-one likes to be told that they have done a bad job, and this is essentially what the bank is saying. Also the transfer of your business to Asset Management turns the temperature up to 11, as business owners are one step closer to losing control of their business. The bank now requires constant updating and the business can't sneeze without asking first for permission. The danger is that you spend all your time adhering to the bank, and as a consequence you have no time left to fix the problems that got you there in the first place.
If you're going to get out of this spiral then there are certain things that we recommend to our clients that you should consider:
1) Understand from the bank exactly what it is about the business that is concerning the bank. This becomes the focus of any future reporting strategies. Some obvious reasons for being put in Asset Management are:
a) Profitability is insufficient to meet debt servicing (interest and or scheduled principal reductions)after all other trading obligations are met (incl tax)
b) Cash is insufficient to meet debt servicing - cash is different to profit. you can be profitable and still not have enough cash because your debtors or inventory is too high.
c) The value of your security has fallen below the bank's comfort threshold, and your servicing capacity is a concern.
d) You or your industry have become unattractive to the bank.
However don't be distracted - these are symptoms, not causes of the transfer. A bank will continue to service a non profitable or inadequately secured customer from the normal relationship stream as long as the credit managers have confidence that management knows how to rectify the problems.
The fastest way out of Asset management is to regain credibility with credit managers that you have the knowhow and ability to trade out of the pickle that you collectively find yourselves in. This leads to the 2nd recommendations
2) Construct a plan early to fix the problem. This plan needs to recognise 1 thing above all else - The bank no longer cares about your future business prospects. It is only interested in how its going to get its money out of your business. The plan needs to tackle growth, sales, trading performance etc from this perspective.
The plan starts with numbers - ie a forecast P & L, Balance Sheet and Cash Flow Forecast - and each number needs to be justified as validate its accuracy.
Ideally the bank will entertain a plan that rectifies financial strength quickly using conservative and realistic assumptions leading to a line of sight to the bank getting its money out. The punchline of the plan needs to be "and then the bank gets paid out!". This payout can come from refinance, sale of assets or surplus cash from trading, but it must end with this line.
3) Agree a reporting format with the bank that is very quick to produce, and goes to the heart of the bank's concerns, and then report as regularly as you can. The best way to cause a bank to appoint an external administrator is to not tell them what is going on. The bank will assume that if they don't know what is happening, then you don't know what is happening.
Be careful here though - the report must be quick to produce. Too often a business decides to prepare a 20 page report for the bank to show them what is going on. the trouble is, this precedence is then set and the bank will expect this level of detail weekly/monthly and that is when you lose control of your business.
4) Be very open and hide nothing. Good news or bad, tell the bank. They will find out anyway, so better it comes from you.
5) Your Asset Management Banker is Human. He/She doesn't want to ruin your life. Not many people are this heartless. They do however have a job to do. If you make their life easy, and if you make them look good, then there is a lot that they can shield your from, and right now you need all the advocates you can get.
6) Don't take the bank's wants on face value. The bank will likely have had an insolvency Accountant prepare an investigative report on your business, and quite often these reports are very one dimensional - sell bits to pay down debt. If you believe that you can trade out of the difficulties without selling things then you should present this, but beware that your plans should not require extra bank funding, as you are unlikely to get it.
7) Consider getting a banker on your team. Having access to a banker gives you the ability to better plan your communication and to understand how the bank will react before they react. They also provide you with a good sounding board regarding the best way to keep the bank on side while you trade out of the situation. Pearl Financial Services provide this service, though any banker would do....
Banks sell the decision as being an opportunity for the business to gain a Business Banker with more time on their hands to spend helping the business through the immediate challenges, and sometimes this is true. They might even charge you for the "privilege" with an extra service fee.
However more often than not, this is a staging post for the bank to then devise a plan to recoup its money, either by pressuring the business to refinance, pressuring it to sell down assets, or, in worst case situations, appointing someone else to do this for them (ie a receiver/liquidator).
Asset Management bankers are a different breed. Generally speaking, they are very financially astute, and quite experienced. However their method of managing the relationship is different to other bankers:
- these guys don't want to get too close because they might one day need to cut your throat (metaphorically).
- They are much less focused on customer needs and much more focused on bank needs. They are not paid to retain your custom, they are paid to find the most appropriate way to secure the bank's funds. IT IS ALL ABOUT THE BANK!
- These bankers are much closer to the decision makers, ie the holders of credit discretions, so things can move much faster in this division.
Generally the business manager knows in their heart of hearts that transfer to this division is coming, but it naturally comes as a kick in the guts when it does. No-one likes to be told that they have done a bad job, and this is essentially what the bank is saying. Also the transfer of your business to Asset Management turns the temperature up to 11, as business owners are one step closer to losing control of their business. The bank now requires constant updating and the business can't sneeze without asking first for permission. The danger is that you spend all your time adhering to the bank, and as a consequence you have no time left to fix the problems that got you there in the first place.
If you're going to get out of this spiral then there are certain things that we recommend to our clients that you should consider:
1) Understand from the bank exactly what it is about the business that is concerning the bank. This becomes the focus of any future reporting strategies. Some obvious reasons for being put in Asset Management are:
a) Profitability is insufficient to meet debt servicing (interest and or scheduled principal reductions)after all other trading obligations are met (incl tax)
b) Cash is insufficient to meet debt servicing - cash is different to profit. you can be profitable and still not have enough cash because your debtors or inventory is too high.
c) The value of your security has fallen below the bank's comfort threshold, and your servicing capacity is a concern.
d) You or your industry have become unattractive to the bank.
However don't be distracted - these are symptoms, not causes of the transfer. A bank will continue to service a non profitable or inadequately secured customer from the normal relationship stream as long as the credit managers have confidence that management knows how to rectify the problems.
The fastest way out of Asset management is to regain credibility with credit managers that you have the knowhow and ability to trade out of the pickle that you collectively find yourselves in. This leads to the 2nd recommendations
2) Construct a plan early to fix the problem. This plan needs to recognise 1 thing above all else - The bank no longer cares about your future business prospects. It is only interested in how its going to get its money out of your business. The plan needs to tackle growth, sales, trading performance etc from this perspective.
The plan starts with numbers - ie a forecast P & L, Balance Sheet and Cash Flow Forecast - and each number needs to be justified as validate its accuracy.
Ideally the bank will entertain a plan that rectifies financial strength quickly using conservative and realistic assumptions leading to a line of sight to the bank getting its money out. The punchline of the plan needs to be "and then the bank gets paid out!". This payout can come from refinance, sale of assets or surplus cash from trading, but it must end with this line.
3) Agree a reporting format with the bank that is very quick to produce, and goes to the heart of the bank's concerns, and then report as regularly as you can. The best way to cause a bank to appoint an external administrator is to not tell them what is going on. The bank will assume that if they don't know what is happening, then you don't know what is happening.
Be careful here though - the report must be quick to produce. Too often a business decides to prepare a 20 page report for the bank to show them what is going on. the trouble is, this precedence is then set and the bank will expect this level of detail weekly/monthly and that is when you lose control of your business.
4) Be very open and hide nothing. Good news or bad, tell the bank. They will find out anyway, so better it comes from you.
5) Your Asset Management Banker is Human. He/She doesn't want to ruin your life. Not many people are this heartless. They do however have a job to do. If you make their life easy, and if you make them look good, then there is a lot that they can shield your from, and right now you need all the advocates you can get.
6) Don't take the bank's wants on face value. The bank will likely have had an insolvency Accountant prepare an investigative report on your business, and quite often these reports are very one dimensional - sell bits to pay down debt. If you believe that you can trade out of the difficulties without selling things then you should present this, but beware that your plans should not require extra bank funding, as you are unlikely to get it.
7) Consider getting a banker on your team. Having access to a banker gives you the ability to better plan your communication and to understand how the bank will react before they react. They also provide you with a good sounding board regarding the best way to keep the bank on side while you trade out of the situation. Pearl Financial Services provide this service, though any banker would do....
Tuesday, July 6, 2010
Banks currently open for business (July 2010)
In Australia you would be excused for thinking that all banks are the same. Oligolopolies promote this. However my experience is quite different.
I assist businesses everyday to get better banking outcomes. Often this involves the business learning about what is important to banks, and occasionally it is because the bank is being very unreasonable. But I am constantly bemused by how different banks act and think, and in this series "Lenders that are lending" I plan to share these experiences.
It is important to note that my experiences are not necessarily what you can expect across Australia, though my business has national reach and my views are influenced by our interactions nationally. It is also important to note that my experiences are ny experiences. Yours might be different and if so then I would like to hear them too.
Ultimately, my goal here is to improve banking competition and to identify bankers who are great for my clients. If you know of great bankers, drop me a note!
Time to name names:
Right now I am sending most of my business clients to ANZ. The credit team understand cash flow lending and they will approve applications for loans displaying sensible risk. They are slow, and they are not cheap, but they are interested in writing business.
I also see evidence of this with NAB, however I am less inclined to send clients there because firstly I am a NAB customer and I've never enjoyed it, and secondly they don't pay brokerage. This is a conflict of interest that I disclose to my clients, and my clients are happy not to go there for the most part. The clients that I do send there, are looked after, though again, things move very slowly and due diligence is very very diligent!
I have CBA looking at a Property development deal that I am doing at the moment and they are performing very well. They are interested in lending, and they have been very open in what they will and won't do, which is great. I am not however taking cash flow lending deals (ie deals secured by business cash flow and working capital assets) as most of the clients I am working with are CBA (assisting with existing bank applications) or bankwest (wishing to exit) clients. The clients that I have who bank CBA are for the most part keen to stay there, which is positive.
Bankwest seems to me to have some very experienced and talented bankers. Where they fall down is that in recent history that have taken on a lot of higher risk clients and this has left their credit department and the bankers a little shellshocked. It is very hard to get deals written here are the moment but I will keep trying as I like the guys that I deal with here.
I am sending a lot of my deals to St George. Trouble is, I can't get one approved. The deals are getting approved, often quite easily elsewhere, so I know its not the deal that's the problem. I don't think St George credit guys understand cash flow lending. I'm told that they want this business, and the Relationship managers I deal with are the most persistent at asking for new client opportunities, but crickey its proving difficult to get a win. I think once you're signed up you love this bank, and that's why I put clients up to them and will continue to. One day perhaps I'll get there.
The bank that I have totally given up on at the moment is Westpac. Everyone I talk to says that Westpac have been shut for the last year or 2 and this validates my experience too. I understand that they see all third party introduced deals as higher risk, and perhaps this is part of the problem. I have lost all contacts as they have got sick of not getting deals approved and have left. I am now at the stage where I can't even get a Westpac banker to return my call. Is it me? All the other banks seem to like my clients.
The one positive thing about Westpac is that I don't get unhappy Westpac customers contacting me wanting a new bank (well I've had one but that's all). Either they don't actually have many customers, which is possible given recent form, or they really look after them once they get on board. If anyone knows a hungry Westpac Business or Corporate banker please send them my way as I'd love to send a few deals to them.
Hope this is helpful.
If you know of any businesses having problems with their bank, chances are there is not a commercial justification for moving, but perhaps a Pearl Financial Services Banker can assist them to way up options and establish what can be done to improve the situation. Give us a call!
I assist businesses everyday to get better banking outcomes. Often this involves the business learning about what is important to banks, and occasionally it is because the bank is being very unreasonable. But I am constantly bemused by how different banks act and think, and in this series "Lenders that are lending" I plan to share these experiences.
It is important to note that my experiences are not necessarily what you can expect across Australia, though my business has national reach and my views are influenced by our interactions nationally. It is also important to note that my experiences are ny experiences. Yours might be different and if so then I would like to hear them too.
Ultimately, my goal here is to improve banking competition and to identify bankers who are great for my clients. If you know of great bankers, drop me a note!
Time to name names:
Right now I am sending most of my business clients to ANZ. The credit team understand cash flow lending and they will approve applications for loans displaying sensible risk. They are slow, and they are not cheap, but they are interested in writing business.
I also see evidence of this with NAB, however I am less inclined to send clients there because firstly I am a NAB customer and I've never enjoyed it, and secondly they don't pay brokerage. This is a conflict of interest that I disclose to my clients, and my clients are happy not to go there for the most part. The clients that I do send there, are looked after, though again, things move very slowly and due diligence is very very diligent!
I have CBA looking at a Property development deal that I am doing at the moment and they are performing very well. They are interested in lending, and they have been very open in what they will and won't do, which is great. I am not however taking cash flow lending deals (ie deals secured by business cash flow and working capital assets) as most of the clients I am working with are CBA (assisting with existing bank applications) or bankwest (wishing to exit) clients. The clients that I have who bank CBA are for the most part keen to stay there, which is positive.
Bankwest seems to me to have some very experienced and talented bankers. Where they fall down is that in recent history that have taken on a lot of higher risk clients and this has left their credit department and the bankers a little shellshocked. It is very hard to get deals written here are the moment but I will keep trying as I like the guys that I deal with here.
I am sending a lot of my deals to St George. Trouble is, I can't get one approved. The deals are getting approved, often quite easily elsewhere, so I know its not the deal that's the problem. I don't think St George credit guys understand cash flow lending. I'm told that they want this business, and the Relationship managers I deal with are the most persistent at asking for new client opportunities, but crickey its proving difficult to get a win. I think once you're signed up you love this bank, and that's why I put clients up to them and will continue to. One day perhaps I'll get there.
The bank that I have totally given up on at the moment is Westpac. Everyone I talk to says that Westpac have been shut for the last year or 2 and this validates my experience too. I understand that they see all third party introduced deals as higher risk, and perhaps this is part of the problem. I have lost all contacts as they have got sick of not getting deals approved and have left. I am now at the stage where I can't even get a Westpac banker to return my call. Is it me? All the other banks seem to like my clients.
The one positive thing about Westpac is that I don't get unhappy Westpac customers contacting me wanting a new bank (well I've had one but that's all). Either they don't actually have many customers, which is possible given recent form, or they really look after them once they get on board. If anyone knows a hungry Westpac Business or Corporate banker please send them my way as I'd love to send a few deals to them.
Hope this is helpful.
If you know of any businesses having problems with their bank, chances are there is not a commercial justification for moving, but perhaps a Pearl Financial Services Banker can assist them to way up options and establish what can be done to improve the situation. Give us a call!
Thursday, July 1, 2010
Business takes away frustration of bank manager changing....
Just as you're starting to get to know and like your banker, he gets a promotion. The new banker starts and, with a sign of exhaustion, you start again. Its your 10th banker in 5 years and there is no continuity in your service, even though they tell you there is a file at their office detailing your history.
Sound familiar? This would be one of the main frustrations of any small business owner "the bank doesn't understand my business".
Pearl Financial Services has today launched a new service which is structureed to address this frustration for business owners. Hire your bank manager yourself.
The Pearl Bank Management service provides a Banker that will take over your liason with your bank, freeing up time for management to manage the business, not the bank.
Have a look at the service here...
Is this a service you can see having value? I'd appreciate your thoughts?
Sound familiar? This would be one of the main frustrations of any small business owner "the bank doesn't understand my business".
Pearl Financial Services has today launched a new service which is structureed to address this frustration for business owners. Hire your bank manager yourself.
The Pearl Bank Management service provides a Banker that will take over your liason with your bank, freeing up time for management to manage the business, not the bank.
Have a look at the service here...
Is this a service you can see having value? I'd appreciate your thoughts?
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