Thursday, 28 April 2011

How to talk to your bank manager...if you know who they are!


Talking to your bank manager – Accountants’ top tips
Emmanouil Schizas, SME policy adviser, ACCA


Accountants are the financial advisers of choice for small and medium sized enterprises (SMEs), so who better to ask for advice on how to get the bank manager to say yes? In this quick guide, ACCA (the Association of Chartered Certified Accountants) has combined research findings and the experience of their members into a few valuable tips for owners and managers of small businesses.

1. Learn the bank’s language

Unless you’re lucky enough to have a long-standing relationship with an experienced bank manager, getting a loan for your small business can be a fairly formulaic exercise. There’s no point telling your bank how profitable you are, how you’ve never missed a payment or how good your product is etc. if that’s not how they measure their risk.

Banks care about specific types of information, and their priorities have changed somewhat since before the financial crisis of 2008-9.

Table 1: What matters to SME lenders (top 5 types of information)
What mattered in 2007-8
What will matter in 2010-11
Item
Importance (1-5)
Item
Importance (1-5)
Cash flow information
4.4
Cash flow information
4.7
Transaction history/account behaviour
4.2
Transaction history/account behaviour
4.5
Key risk indicators
4.0
Collateral
4.4
Collateral
4.0
Key risk indicators
4.3
Financial statements
4.0
Industry trends
4.3
Source: The Banker / IFAC SME Lender Survey, September 2009

As you can see on Table 1, lenders now make more extensive use of information in order to decide on a loan application. Traditional financial statements and key risk indicators are less important than they used to be pre-crisis, whereas collateral and information on industry trends have become more important. Consistently at the top of the agenda, however, are cashflow and transaction histories.

It is important to prepare realistic cashflow projections on a regular basis and to make sure the business can be cash positive in the long run. As for your transaction history, your bank manager will presumably have access to this and will be scrutinising it for signs of trouble as we speak. Make sure you can account for all transactions, especially abnormally large ones. The objective is to reassure your bank that your cashflow is steady and reasonably predictable, that you can pay on time when you need to and that you are not relying on windfalls to keep you afloat.

Most of all, remember that for your bank manager even bad news is better than no information. Be honest and forthcoming or you will risk damaging your banking relationships for ever.

2. Show them you are in control

Our more experienced members are always reminding us that more businesses go under during a recovery than during a recession. This is because businesses tend to over-trade as orders pick up again, committing to more work than they can safely deliver based on their working capital. Banks know this too, so your aim should be to show your bank how sustainably (not how fast) you can grow your business, and that means demonstrating you are in control.

This is one of the reasons why bank managers will want to see your cashflow projections alongside your business plan. The figures will almost certainly never turn out to be spot on, but if you can demonstrate that you understand how your business generates and uses cash, it really doesn’t matter – you’re automatically a slightly safer pair of hands.

Remember – this is not Dragons’ Den. Your bank manager is trying to figure out the downside, not the upside to their investment. There’s no point telling them how much money you are planning to make if there’s a good chance they will see none of it.

3. Think like a bank

Banks generally understand and accept that they must take some risk if they want to do business. But some types of risk they are happier with than others. The kind of risk banks really don’t want to take on is your trade credit risk – the chance that you will get into trouble because your customers can’t pay you in time – or at all.

If you’re extending credit to your customers, you are a bank. You may not think so but your bank manager does. And like a bank, in order to get anyone to lend you money, you have to convince them that you don’t need bailing out. Table 2 shows you how you, too, can think like a bank – without the jargon.

Table 2: A simple translation of bank-speak
Bank-speak
Small business English
Do we have robust and integrated risk management systems in place?
·       How much exposure do we have to key customers/clients? How much of our turnover and cashflow depends on them? Are they financially healthy?
·       How tight are our credit policies and how strictly do we adhere to them?
·       How good are we at chasing up invoices and other customer debt?
·       Have we made provision for bad debts? Do we know what shape we will be in if key customers start paying late or fail to pay at all?

Do we have enough capital to ensure solvency even under stress?
·       Do we have / will we have enough working capital to meet incoming orders?
·       Does our business have assets it could sell or borrow against? What are their values in today’s market?
·       Am I able to inject more of my own money into the business at short notice? Do I have personal property I could sell or borrow against?

4. Get a sounding board

According to research, small businesses find business plans and other forward-looking statements more useful in their efforts to raise finance if they have been prepared by a third party. It is possible for owner-managers to get too attached to their businesses and to their own plans, convinced that they can meet their objectives even against the odds. This can-do attitude often serves entrepreneurs well, but it’s not popular with their banks.

A recent survey by The Banker magazine and the International Federation of Accountants (IFAC) revealed that 59% of small business lenders were more likely to consider would-be borrowers if they had used a professional accountant, external to the business, to give them advice and support.

Alternatively, try to build a relationship with your bank manager and use them as a sounding board. An ongoing relationship provides banks with an abundance of information and can help build trust and empathy. The Government’s latest statistics suggest that, even in the good days of mid-2007, only 15% of all the SMEs seeking external finance relied primarily on their banks for financial advice. This is good news for ACCA members (28% relied primarily on accountants), but with trust in banks falling across the SME sector, businesses could be missing out on an important source of advice.

5. Think outside the box

Don’t assume that traditional term loans and overdrafts are the only things you can get from a bank. In addition to their own capital, banks can tap into government guarantees (the Enterprise Finance Guarantee) or funds from the European Investment Bank (EIB) when lending to small businesses. It is possible that if you’re not a major risk your bank could still lend you the money you need in either of these ways, because either the cost of these funds is lower or somebody else is sharing the risk with them. Bear in mind that some bank managers either don’t know about these products or will not go out of their way to inform you. Ask them about these and insist that they come back to you with alternatives to the loan you’re thinking of applying for.
This may seem like a lot of work and –at least the first time around- it will be. However, the effect on your business’ access to finance can be substantial. More importantly, the process can pay for itself by getting you to take control of your business and make it more rational and efficient. In fact, you may find you don’t need a loan at all, or perhaps that you need to think even further outside the box, from invoice finance to equity investment. Learning to talk to the bank manager is just the beginning.

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