With banks tightening their belts, Greg Begley explains how to get the financial backing you need.
'May you live in interesting times' is a Chinese proverb usually applied to global political issues, but it's just as pertinent in today's financial turmoil. In the current environment, we've seen attitudes to lending change. Banks now need to regain the trust of customers, while enforcing new, tighter lending habits. As banks seek to rein themselves in and re-build their weakened balance sheets, what does this mean for your business?
A Brave New World
The answer is simple and complex: simple in that banks must allocate a proportion of their own capital to every loan they make, and many don't have enough; complex because since January this year banking regulations have become more rigorous regarding capital adequacy ratios. For businesses this means tighter lending criteria, higher pricing, tougher terms and conditions, shorter lending periods and more restrictive covenants.
What advice can we give? Recognise the changed circumstances and follow the Scout motto: be prepared. Understand who you are dealing with. Your relationship manager/director, deal originator or whoever you meet on the 'front line' is not the decision maker. These people prepare and submit proposals, but it is the credit underwriters who need to be convinced and, in the present climate, it is safer for them to say no to any lending proposition that appears to be marginal.
The Winning Formula
So what can be done to win a bank's support for your business? Presentation and confidence are crucial. Poorly presented business plans can put a swift end to a proposition. It's important you include enough detail, support your confidence with realism, show an appreciation of risk, and be consistent and reliable with supporting numbers.
It's also important you take time to build belief and trust with your bank. On the practical side, this means being careful about breaching covenants and being conscious of the timeliness of financial information. With banks becoming more cautious, a lack of quality information may lead them to assume the worst.
Facing The Future
What does the future hold? In the short to medium term we expect to see more of the same: credit conditions will continue to tighten as banks go through their annual review cycle with business customers. The economic environment will be challenging and the days of relatively cheap credit readily available on light covenants is gone, if not forever, certainly for the foreseeable future.
Don't despair; banks still need to lend. But they will be more sharply focused on what they deem to be superior credit risks. Seeking bank debt finance is no longer purely down to a chat with your bank manager. Instead, a more professional approach is needed, one that can bring rewards in terms of consistency and ongoing support. If necessary, consider using specialists who can add value to the process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
