Every business owner loves their bank. Well…not really. We’ve all seen the ads, read the brochures, heard the pitch. But is any of that marketing true? I’m sure you can dredge up five banking horror stories of a bank’s willingness to lend the umbrella when it’s sunny and take it back when it rains…of their intensive interest in selling to you and apathy when you really need them.
The absolute requirement for growth is capital. There are three main sources:
- Capital you contribute – though it’s a shame owners often don’t like putting back the capital they have taken out
- Retained profits – while owners are usually willing to leave a share behind, it’s rarely enough to fund the growth of a passionate leader
- Debt – a safe level of debt for most businesses is 50% of required capital, which quickly means the other 50% needs to come from a bank or other debt source
So, reality sets in. A bank is a required partner of almost every business – and an important one at that. In theory, bankers should be great partners and owners should have an ability to manage the relationship. The skill is in looking at it from both sides.
How to effectively manage a bank partnership
Partnerships require learned behaviours. In my life, with my wife, children, colleagues, clients and so on, if I feel like a partnership is not working, the first thing I’ll ask is, ‘am I doing what’s needed to be an effective partner?’. Most of the time, for improvement to take place, the answer points to my need to change. It’s no different with a bank. Are you doing everything that’s needed?
All bankers operate on the same general premise…just with different policies attached. That simple premise is based on the five Cs of credit.
If you’re accountable – you do what you say you will do – you quickly build a frame of character your banker can rely on. Banks don’t actually expect everything to go right. They just expect you to fully declare where you’re at and what you’re doing if things aren’t going right. It’s about keeping them fully informed of the journey, because if you’re not doing well, it’s your bank’s problem too. Character means accountability with transparency.
Banks will continue to lend to businesses that demonstrate their ability to service debt. As a business owner, it is critical you manage your ongoing cash flow. That means doing everything you can to widen it and grow the output of your business while ensuring you are always provisioning conservatively – ie throwing a pipe in your cash flow and sending some into a reservoir where you don’t rely on every dollar. The reservoir ensures you can always demonstrate your capacity to pay the bank as needed.
Few business owners fully understand the need to manage a balance sheet to minimise its capital requirement. The debt to equity ratio of a business is absolutely critical for banks. Having an inflated balance sheet, where the difference between debt and credit is used the fund your business, is a major flag to bankers. Bankers understand their exposure to you is immaterial to their balance sheet but material to yours. Your commitment to your wealth is their security and tight management of your balance sheet demonstrates just that.
People tend to think bankers are only interested in property. They are not. They are interested in collateral that can be turned into cash if needed. Understanding the assets that are valued by your bank and holding them on your balance sheet in the right way will allow you to better access the capital you need. Without that collateral, bankers are effectively lending on a wing and prayer.
Even the most specialised of bankers have little understanding of the real conditions you’re facing. The person that knows your business best and has the clearest understanding of the road ahead is you. Meeting regularly with your banker, and controlling the agenda so it’s a strategic discussion about your conditions, will:
- Ensure your banker has the best ability to represent you inside the bank, linking you to more credit potential
- Allow you to foster a deeper trust in your character as you honestly declare your position.
Under-promising and over-delivering is the best position to be in when it comes to discussing your conditions with your banker.
The sixth C is confidence
These five Cs come down to an additional C and that’s confidence. Building the confidence of your banker in you and your business is the ultimate goal. As a lender, it’s critical to understand the context of their partnership with your business. Demonstrating that your governance is structured around the effective management the five Cs, delivers the confidence that underpins a true banking partnership.