How to borrow money from your bank

Rate this item
(1 Vote)

Business bank managers everywhere despair, every day, at the quality of the loan requests they get. To make it worse, these requests are from established businesses, from MD's who, supposedly, know their stuff.  Lenders are given limited information and questionable financial data. This comes accompanied by an expectation that no reasonable bank manager could possibly fail to see why it is a good idea to hand over a big pot of money.

So what is going wrong ?  Why is there a mismatch between the expectations of the bank manager and those of the managing director ?

Here is my take on this :

  • Some managing directors are just too brainy !  They are so clever they just cannot understand why the bank manager cannot see what is so obvious to them;
  • Some MDs are just lucky. For them, business is a no-brainer. It just works and it works well. They can't explain it - but someone needs to, as the bank manager doesn't get it;
  • Deluded MDs, who really haven't got a clue about the risks they want to take on. They are on a wing and a prayer, with well-honed coping strategies; not that coping strategies are always a bad thing, but they don't make a lender want to lend;
  • Ordinary MDs who are good at their stuff, but don't place much priority on the finances, as the basics are in place.  They are a bit busy and a bit phased and perhaps don't take their presentation to the bank as seriously as they should;
  • The banks have made cuts and spread their relationship managers pretty thin. These guys have a lot on their plate and they need the decisions to be made easy for them.  They can't be doing with requests that involve too much hard work; there are too many of those to deal with them all.

What does the bank want to see then ?

What will make it easy to get a decision in your favour ?

  1. Confidence that he or she will get the money back. This translates into security - charges and or  guarantees with good asset backing, possibly key man insurance;
  2. Confidence that you can service the interest and repayments. In other words, a steady income stream;
  3. Confidence that you know your products and markets;
  4. Confidence that there is a skilled management team in place;
  5. Confidence that the business has access to the right professional advisers. Who are they and what use is made of them ?
  6. Confidence that there is solid management information and proper financial controls in place.

There is a theme there, which you may have picked up on. You need to provide confidence. What the banker gets given, day in and day out, is business plans - I use the term very loosely - that are a picture of a lemon, or a somewhat sketchy picture that might just be made out as a lemon, or sometimes just a frame with a bit of a scribble inside.  Sometimes they come stencilled "THIS IS A LEMON" in big letters across the front, even when they aren't.  You might be giving them strawberries and cream, but the packaging is all wrong.

So what do you need to show, to instil that confidence ?

Here is a checklist  :

A) The amount and the reason for needing it;

B) A plan for repayment showing how much and over what period;

C) Up-to-date financial statements : a profit and loss account, balance sheet and funds flow statement, ideally showing comparisons to budget. These need to have been produced by a competent person - the bank manager can tell when they have been produced by someone who doesn't really know, for example,  how a balance sheet works. If it is a new bank, then the history will be needed as well, which means the financial statements for the last three years;

D) A business plan. If you are asking for a large loan, then you will need to provide good context.  A brief history of the business; the names of the key people and their skills (including who is keeping the books and who is ensuring financial controls and producing management information); the markets and products and how you bring the two together; the infrastructure that exists to make the business happen; any relevant key events or tasks; highlight the major risks and and any changes the business faces;

E) A budget or projection covering at least the next twelve months, showing how your expect your plans to translate into financial reality.  Typically this will be a profit and loss, a balance sheet and a cash flow forecast.

If you are going for some form of debtor finance, perhaps invoice discounting or factoring, then the bank will want to take a detailed look at your debtors ledger and credit control procedures.  They need to satisfy themselves that those receivables really are receivable and that your business is competent at collecting them.  Debtor finance will be the subject of an upcoming article.

The bank may well take a close interest in creditors as well, asking for an aged creditors listing and details of amounts owing to HM Revenue and Customs.  This is not the bank nit picking, this is evidence of a manager who is on the ball.

If you are not good at this stuff, then that is why we are here. We are good at it and we can help you sell your story to the bank.

Register to get access to our free downloads that help with this process, including a cash forecasting tool and a loan assessor to price and compare loans.

Last modified on Tuesday, 31 May 2011 17:18
More in this category: Cash and Credit Control »

2 comments

  • Comment Link FDPO Monday, 06 June 2011 21:38 posted by FDPO

    A senior manager with one of the leading banks, with over 25 years' experience of lending to businesses of all sizes, read this and commented :

    "I agree with virtually every word. The article is full of practical points of guidance as to how customers / would-be customers can help themselves to get the decision they want. Three things that I'd add are:
    1) They don't tell the full story because they think certain points are too obvious to mention. The problem is that the points are only obvious to them.
    2) People are often too close to their business and, as a result, unable to stand back from it and be objective.
    3) Products & markets : I'd add in the need to demonstrate an understanding of competition here. What are the barriers to entry for potential competitors? Do competitor firms/products have a commercial advantage? If so, how can this be matched/negated?"

  • Comment Link Tom Fuller Tuesday, 31 May 2011 20:49 posted by Tom Fuller

    As an ex banker I would add is that all banks are looking at the cashflows of the business and it is this understanding that drives a positive response from lenders as it will demonstrate serviceability. Future flows from speculative trading will be challenged as often there is no underlying evidence of achievability. Additionally – how articulate are the business owners around KPI’s and keeping on top of trading at least weekly. Poor knowledge/ability here would not give confidence.

Login to post comments