Bank on them

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There’s a credit squeeze on, which makes it even more important to have a good relationship with your bank.

LOVE THEM OR HATE THEM , there are times when support from a bank is necessary for business survival. The attitude of banks to lending has changed markedly over the last 5 years. Tighter lending criteria are now being demanded and enforced.

While the whole sector has been affected, individual banks have varying levels of exposure to bad debt, so don’t be disheartened if you cannot immediately obtain the deal you want. It pays to shop around.

Be professional

Successfully securing bank debt funding requires a professional approach. Poorly presented business plans can put a swift end to a proposition. Include enough detail, show an appreciation of risk and be consistent and reliable with supporting numbers.

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What the banks will look at

There are four critical elements in seeking additional finance:

  • Your professional profile – bankers evaluate your ability to manage and sustain your business position, so you must show that you have the skills and determination to carry on and improve your position.
  • Your project’s viability – your business plan must be clear, structured and short, while covering all elements of your business idea. Extensive forecasting is highly recommended for your own strategic planning and to increase your banker’s confidence in your business. Model a range of financial, operational and workforce scenarios that reflect the impact of the downturn on your business.
  • Your financial strength – bankers want to know your personal and business net worth to judge your ability to meet your financial obligations and past credit history.
  • Your investment and collateral – bankers will ask for some investment on your part.

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First, do your homework

The reporting you provide to the bank must be accurate and reliable. This protects your credibility and strengthens the bank’s trust in you. Review your budgets by looking at worst-case scenarios and preparing strategies for dealing with each. Identify factors that would cause you to default on your loan and have a pre-emptive plan in place.

The bank wants you to stay in business but you need to show that, even if you temporarily hit hard times, you have a strategy that will protect you and their loan.

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Keep in touch

Unfortunately, for the immediate future, credit conditions will continue to tighten as banks go through their annual review cycle with business customers. The days of relatively cheap credit readily available on light covenants is gone for the foreseeable future.

Even if you are performing well, you should still talk to your bank regularly and keep them informed about your situation. The tide may turn unexpectedly for you, and with foreknowledge, the bank will be better prepared to help you.

If you are not doing well, let your bank know and explain what measures and actions you have implemented to address the issues. Don’t let the bank manage you – bring the problem and your solution to them as soon as possible. Time is an important factor in dealing with any issue, especially a financial one. Keeping your bank informed stops it assuming the worst of your business.

Like most difficult situations, the way to gain the support of your bank is through communication – about the problem, about your plan to come through the problem and about how you are capable and confident with the solution.

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