The first rule of thumb when building a relationship with a financial institution is to beware of loan sharks. The global financial crisis has essentially decimated the number of financiers leaving a landscape dominated by the Big Four banks. They, along with an equally decimated number of specialist asset financiers, are about the only sources of ‘reasonably-priced’ business finance in the market today.
‘Reasonable’ is a relative term: whatever you are paying on banking facilities would be cheap compared with the rates being charged by third or fourth tier non-bank financiers, or loan sharks.
Risk has been re-priced, not just domestically but globally. Retaining your facilities at their current levels and possibly obtaining the additional funding needed to meet your business requirements should be of greater concern than a few percentage points increase in rates. This is assuming, of course, that your business isn’t overleveraged.
In the current barren landscape, the banks are a key source of (relatively) cost-effective debt financing for most small and medium-sized enterprises (SMEs), supplemented by debtor and/or equipment finance from specialist providers as necessary.
Refinancing isn’t quite so easy these days and there’s no guarantee that any new relationship will be a significant improvement. Building a constructive partnership with your existing bank is the better way to go in this climate.
Banking relationships, like all relationships, are two-way streets. However, an SME does have to be the more proactive partner in building the relationship with its bank.
Depending on the size of the business and facilities needed, your bank manager will be dealing with anywhere from 40 to 150 or more accounts. It’s unrealistic to expect your relationship manager to spend the time needed to really understand your business – except when your account is considered to be ‘a problem credit’, at which point you will be subject to very close scrutiny that won’t be by your usual manager.
Four Tips for Building a Strong Banking Relationship
- Provide a business context as part of your financial reporting. Do not just send in a set of financial statements. Regardless of whether it is monthly, quarterly or annual reporting, you should provide some commentary about the business in relation to the numbers, particularly if there are unusual/abnormal items or adverse movements, such as a decrease in profitability.
- Annual reviews should be handled like a new application for finance. You should provide a brief business plan, as well as budgets/forecasts with clearly stated assumptions.
- Meet all your obligations. This includes non-bank obligations, for example payments to the Australian Taxation Office (ATO), and non-financial obligations, such as providing reporting in a timely manner, adhering to covenants, etc. The strongest recommendation in a credit submission is effectively: “(the business owner) has always met his/her obligations as and when they fall due” or “(they) would not undertake any obligations that they could not fulfil”.
- Do not give your bank any surprises, which they hate. Think about it, it is a nasty shock if one of your debtors suddenly turns up and says: “I can’t pay you for a while. I’m having some difficulties.”
If you anticipate problems in meeting a loan repayment, or if there is a possibility that you might go over your overdraft limit even if only for a few days, talk to your bank before it happens.
You should be able to anticipate these issues if you have sound cash flow management systems in place. If you don’t, it’s time to get them in place. Obviously, you need to have developed action plans to rectify the issues by the time you meet with your banker.
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