Don't surprise your banker
Written on the 12 May 2009
Entrepreneur, consultant, educator and author Dr Tom McKaskill has established a reputation as one of the world’s leading authorities on exit strategies for high-growth enterprises.
BANKERS hate surprises.
The last thing they want is for you to come to them at the last minute with a request for a loan or an overdraft to save your business. We forget that banks work on very thin margins, often around 2 per cent.
If your $10,000 loan goes bad, they need to write $500,000 worth of business to recover the loss. In this situation, you can understand them not being very happy with your news. If your loan gets refused, you really need to blame yourself for not taking the time to work closely with your banker.
You need to see the bank as a partner in your business because when you do well, they do more banking business. But they are a limited partner in that they have very little upside when you do very well but they are greatly exposed when you are unable to pay your debts. They are, however, in the risk business to an extent.
They charge you interest not only to recover their expense and make a small profit but also to cover the risks of default. If they do lend too little they don’t make the additional profits on the marginal loans. If they lend too much, they incur greater loan defaults. So there is a delicate balance between too little and too much. What you need to do is to give them some level of comfort that you are good for the marginal loan, that is, you are an acceptable risk. You can achieve this by ensuring they understand your business risks and the manner in which you deal with those. The more confidence they have in you, the more likely they will take the risk in supporting you when you need help.
My first business was a computer software start-up. It was very much feast and famine so I really did need the support of my bank to cover us during the lean periods. I met with my personal banker every month and gave him a complete set of accounts and a six-month cash forecast based on worst, most likely and best estimates.
When we saw a downturn coming, I would propose a series of measures to bring more cash in or cut expenses. After he had worked with us for a couple of years he could see the patterns in the business and knew that we would take the actions to correct foreseen problems. On that basis, we were able to negotiate a loan facility which was sufficient to see our business through the troughs.
The key to working with a bank is to be honest, understand your strengths and weaknesses, provide good information and meet them regularly so a proper decision can be made and be prepared to accept advice. Accept that banks are not there to prop you up. You still have to make the business work, but they can help if you can fit in with their business model.