As I said last week, banks look at how you control your business and particularly how you manage any accounts that you have with them.
The following always help:
1 Banks will not want to lend to a company if the money it needs is locked up in the business because of poor cash flow and credit management. Make sure that your own cash management is good first and your current account runs well, then go to the bank.
2 Use the scouts motto “Be prepared”. “If you don’t do your homework, there’s no point in going to the bank. Go to the bank with a detailed plan.
3 Help the manager understand your business. Provide as much information as possible by way of a business plan (who you are, what you do, latest financial accounts, reason for your request, projected profits and cash flow and how you will overcome any unexpected problems) BEFORE your meeting. This gives comfort to the bank that you are organised and allows them sufficient time to do their own analysis.
4 Arm yourself with a good accountant and perhaps invite him to the meeting. Banks love analysing ratios and trends and have the confidence that figures have already gone through a sense check.
5 Regardless, use your accountant to make sure you understand the principles of assessing a balance sheet and common margins (think of the Dragons den programme when everything goes wrong when clients squirm over balance sheet questions)
6 Make sure you can answer tricky questions about falling demand, or what will happen if sales decrease by 15 per cent if a supermarket opens nearby. Show you can plan ahead for that worst-case scenario.
7 Be realistic regarding how much you want. It is better to be conservative and allow for a few contingencies rather than ask for a lower figure which may be initially agreed only for extra finance to be declined because of poor account conduct.
8 Consider the request from the bank’s perspective. Do not expect the bank to shoulder the full amount of expenditure / cost. If you are making profits, it is not unreasonable for a sizeable amount to be ploughed back to assist with extra finance. If you have withdrawn previous profits and need to reinvest some of these, provide evidence of how this will be done.
9 Don’t expect the bank to shoulder the whole risk. If you are not prepared to demonstrate you confidence by agreeing to a bank guarantee or (if it is a large amount) provide valuable security, do not be surprised to be turned aside. Based on a loan being 5% over base rate, the bank needs to get 95 out of a 100 decisions correct to break even. If security is provided, it provides more leeway for them and gives them confidence that you believe in the future.
10 Banks do not value security the same way of you may value it. The bank will value your business as though it has failed (i.e. virtually no value). Commercial / retail premises are often difficult to sell in a distress situation. If you own a house worth £500,000 with a mortgage of £200,000, the bank will probably value this nearer to £150,000 rather than £300,000, ie. be prepared to offer more security than you initially anticipate. If you have confidence and know things will work out, giving security should not be a problem.