How to Get the Bank to Say Yes – Now and in the Future By Mark Holton on May 8, 2020
More and more there is a compelling need to deal effectively deal with Banks. In the current environment many businesses are looking towards the Banks for assistance with managing COVID-19 consequences through suspending repayments for set periods and support with loans for operational cash flow and the like.
Even before the Global Pandemic interrupted our personal and business life, we were having difficulty getting funds for clients often having applications for new funds declined and calls by Banks for existing facilities to either be reduced or refinanced. It is also becoming more common that Banks need additional information (budgets, cash flows, statement of salient financial indicators etc…) for loan assessments. The days of simply submitting historical financial statements seems to be in the past.
Businesses owners and their advisors need to be able to clearly and compellingly articulate why their lending proposition should be supported by the Bank. This needs to occur with every communication with the Bank including new loan submissions and amortization review meetings.
The Lenders often have predetermined Key Performance Indicators (KPI’s) to retain customers and find new ones. Each year their clients amortise a component of the principal loan amount. Hence the Bank needs to replace this just to keep making the same EBIT that they did last year. This is obviously before they achieve their growth targets.
To assist Business Owners and Advisors in preparing for a bank presentation, the following fifteen questions should be considered. These are by no means extensive and should be considered as a guide to assist with loan material preparation.
- Can you pay the Bank back? The Serviceability Test.
- Does the business generate sufficient operating cash to cover the interest and principal reduction with room for a possible interest rate increase?
- Do you know the quality of the cash flow – is the finance required to fund growth or is it
- required to cover a cash shortage due to changes in financial performance?
- Do you have fast growth indicators that signal that volume is detrimental to cash?
- Do you have the right mix of short- and long-term funding?
- Does the business have liabilities that might jeopardise the Banks position ie income tax, GST, key suppliers with substantial outstanding dues?
- Do you have correctly prepared budgets and cash flows that substantiate your future?
- Are there external environmental factors and industry trends that might adversely or positively impact on your profitability, ie competitors, regulation, emerging markets etc?
- Are your working capital levels appropriate and trending reasonably?
- Can the business demonstrate future viability and growth to support its funding requirements?
- Does the business generate a sufficient return on capital employed for its shareholders?
- Do the Directors have a clean credit history and the business a clean trade credit history?
- Do Directors have sufficient equity in the business relative to other creditors?
- Does the Bank have sufficient security?
- Is there an active market for your business should it need to be sold as a going concern or liquidated?
Remember using strategic diagnostic software tools may assist in the articulation and preparation of materials required by Lenders to generate success with loan applications. Creating and implementing a pre-lending assessment system is also a great way to start or enhance your advisory services in a time where cashflow is king.
Understanding both sides of the table is critical to ensure that you, and your clients, business is sufficiently funded to meet the needs of future growth and at this time for financial survival.