managing your banking relationship - why it's not just about money!

Managing Your Banking Relationship

Why it’s not just about money

By James Price, BBM, FAIM

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2 jpabusiness.com.au +61 2 6360 0360

Table of Contents

Introduction ........................................................................................................... 3 Building a relationship with your bank ..................................................................................................... 3 How to control your bank’s appetite for lending .................................................................................. 4 Don’t have any debt? Then think like an investor ................................................................................. 4

1. Servicing ............................................................................................................................................................ 6 It’s not all about you .......................................................................................................................................... 6

2. Security .............................................................................................................................................................. 8 Post-‐GFC world less ‘secure’ ............................................................................................................................ 8 Why a strong balance sheet is key to success .......................................................................................... 9 Banks are on your side ...................................................................................................................................... 9

3. Surety ............................................................................................................................................................... 10 Are you a sure thing? ...................................................................................................................................... 10 How you can influence your ‘surety’ ........................................................................................................ 11

4. Communication ............................................................................................................................................ 12 Learn to manage your bank’s expectations .......................................................................................... 12 How much do I tell and how often? .......................................................................................................... 13 How to open the lines of communication ............................................................................................... 13

Disclaimer: The information contained in this eBook is general in nature

and should not be taken as personal, professional advice.

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Introduction By James Price, BBM, FAIM

Remember the TV advertisement where the banker at the barbecue announces his profession and suddenly everyone becomes quiet and still, even the dog?

A lot of business owners – large and small – would rather not have a relationship with a bank. They get nervous dealing with banks, and are uncertain how to communicate with them.

In fact, many business owners see banks as akin to the tax man – a necessary evil.

My view is that, in modern business practice, this perception couldn’t be further from the truth.

Most businesses have others – whether they are banks, financiers, equity investors or family members – who underwrite their business’s performance and operations. They are critical to the success of the business because, by virtue of their investment in working capital, debt finance, equity, or as guarantors, they’re sustaining the operation.

Building a relationship with your bank The extent to which you have a good relationship with your bank or financier says a lot about the value of your business and, in my view, is a true test of the real value of your business.


Remember, they’re not in your business, but they have entrusted some of their precious funds to sit on your balance sheet and help you do what you do.

The way in which they invest and the requirements and covenants attached to the finance backing they provide, say a lot about their appetite for financing your business.

‘Appetite’ is based on the extent to which a bank or financier is prepared to fund a business and take risk on it, and as a business owner there are a number of things you can do to influence that appetite.

How to control your bank’s appetite for lending A bank, financier or equity investor focuses on three S’s when considering their appetite for your business. They are:

• Servicing • Security • Surety

A fourth important factor influencing their appetite for lending, and which you need to take control of, is Communication.

None of these factors are completely controllable, but they are strongly influenced by your actions as a business owner.

Don’t have any debt? Then think like an investor Some readers will feel the information in this eBook is not relevant to them because they don’t have any debt.

They may have developed their business to the point where they own and operate it and have capitalised their balance sheet to the extent that it is without debt.

I would suggest that, in many respects, the themes in this eBook are highly relevant for someone in that position, because they are an investor in their own business.


I often talk to business owners about occasionally trying to take off the ‘operational/in-the-business’ hat and put on the ‘investor’ hat.

Think to yourself:

• What do I have invested in the balance sheet of this business? • Is that generating a suitable return for me as an investor? • Are the risks and issues being managed sufficiently that I have

confidence my appetite as an investor or financier is going to be met? • Is this the best use of my funds?

It is important to pressure test this from a strategic point of view at least once or twice a year on a disciplined basis.


1. Servicing

We’ve talked about cash flow in previous eBooks and we’ve talked about surplus earnings and sustainable earnings being key to driving business value.

So it’s not surprising that when a bank considers their appetite for lending to your business, they want to know ‘what is the serviceability of the loan?’

Servicing relies on your business’s ability to generate surplus cash flow.

It’s about having surplus funds over and above your financial obligations and commitments, to provide a buffer in the event of a shock or downturn.

It’s a bit like driving a car with airbags, versus one without.

If you crash with no airbags, particularly at high speed (think Global Financial Crisis!) the situation is often dire. But a decent airbag – or surplus cash flow – provides a buffer in the event of a shock.

It’s not all about you A buffer helps you as a business continue to do what you do, but it also assists your investors and financiers, because it means that you can meet your commitments to them.

Remember, banks have commitments too. Money has been invested with them and they are committed to providing a return on those funds to their investors.


So a buffer allows those commitments to continue to be met.

Banks and other financiers will likely apply measurements or covenants to assess your ‘servicing buffer’. Such measures might be termed Interest Cover, Fixed Cover Charge, Debt to EBITDA Ratio and others.

These have slightly different calculations, but they all look at the likely surplus cash your business generates over and above your operational debt servicing and statutory obligations and commitments.


2. Security

Financiers don’t just consider your ability to service a loan, they also look at the value of your security – or assets – because they have to consider the worst-case scenario.

Business owners hear terms like ‘loan-to-value’ ratio. This is the percentage that the loan represents of the value of one’s assets.

These assets are ‘hard’ items such as:

• land; • property; • buildings; • plant and equipment; • stock and inventory, and • (sometimes) debtors.

Banks and financiers need to gauge the marketability of that security and the degree to which, if the worst were to happen, they could realise their funds outstanding to you, through the sale of that security.

Post-GFC world less ‘secure’ As we’ve worked through the six years of the GFC, banks have been more fastidious in pressure testing the value of security on businesses’ balance sheets.

Even some business owners who had sound balance sheets and banks with strong appetites for lending to them prior to the GFC, have found their banks’ appetites for lending to them have waned.

This is due to banks and financiers revaluing security based on what they consider the ‘up-to-date market value’.


Why a strong balance sheet is key to success Many business owners, in small and large firms, don’t really focus on their balance sheet.

They look at their profit and loss and if they’re making a profit they think ‘everything’s fine’.

From our experience, the balance sheet of a business is often the key to its success.

A healthy balance sheet is one in which:

• the net position on the balance sheet is strongly positive; • the strength and quality of the assets versus the liabilities are

verifiable and current; • the debtors collection is repeatable and within payment terms; • the creditors are not extended beyond reasonable payment terms;

and • liabilities and obligations are recorded and accounted for.

A healthy balance sheet is often the key to being able to withstand shocks. It often provides a financier with confidence to support your business with additional funds when things are tight.

Banks are on your side I can say without a shadow of doubt that for all banks, most financiers and many equity investors, the last thing they want to see happen is your business sold up because you’re not meeting your commitments and they want to realise their funds.

Maybe that’s contrary to the popular view among business owners, but no one in that environment wants to see you fail.

Remember, a bank has an investor to whom they have promised a return. All they want to do is ensure that return is solid and sustainable, so they can then meet their clients’ expectations.


3. Surety

Surety is about managing the expectations between the risk taker and the risk holder.

As a business owner you have cash and equity invested in the business; you’re a risk holder.

If you have finance from a bank, financier or equity investor, they too are risk holders.

However they are also risk takers; they are taking a risk by investing in your business and they’re earning a return from that risk.

Surety is about how confident those investors can be that you are going to continue to operate as you are now and meet the commitments they require in order to get a return on the funds they have invested in your business.

So surety is about confidence and sentiment and, to some degree, is actually an intangible.

Are you a sure thing? There are a lot of factors which influence surety, including:

• Your level of experience as a business owner.

• Your expertise in your current industry.

• The degree to which you as a business owner measure and manage your business.

• The level of systems and processes you have in place to manage the risks, opportunities and operations of the business.


• The risk and potential consequence of an economic or other shock in your business.

• How well you are managing succession planning in your team and the depth of expertise within the business.

• The degree to which you have diversity in your customer or client base.

Surety is the health of the underlying business, disregarding how much cash it’s generating and the security on the balance sheet.

These factors can be tangible and intangible things in the business, but still incorporate things you as a business owner and manager can control and influence to build a predictable business.

How you can influence your ‘surety’ Surety can be influenced greatly by the information you as a business owner provide to your lender or investor.

Your financier doesn’t want to see you fail, but they can’t impact the business like you can because they’re on the outside.

They only know if you tell them.

Most of all, surety is about opening the lines of communication and keeping your investor up to date on how the business is performing.

We’ll talk more about this critical aspect of managing your banking relationship in the next section: Communication.


4. Communication

We often think that loans are all about numbers and interest rates, covenants, margins and fees, and repayments.

Well, I’m going to let you in on a secret: finance has very little to do with money.

Of course, finance is primarily about meeting your financial commitments, but it’s also a social science; it’s about communication.

A good banking relationship is founded on:

• clear expectations; • listening; • understanding; • problem solving and, • proactive communication.

Nothing is more critical to your banking relationship than strong communication.

Learn to manage your bank’s expectations As a business owner you must be prepared to manage expectation, to talk with your banker or financier about the bad times and good times, the cash surplus you might have or the cash tightness you’re experiencing due to rapid growth or market fluctuation.

If you don’t tell your bank or financier when something significant is happening or likely to happen, but then miss a commitment or fail to perform according to their requirements, they get worried.

And a lack of information only makes worry worse.

So it’s your responsibility to be open, clear and transparent as a communicator to your bank, financier or equity holder.


How much do I tell and how often? The extent to which you need to communicate with your bank will depend on what is happening in your business, your plans, the pressures, the requirements and covenants of your loan, and your system of operating.

Often a requirement for additional finance may come unexpectedly, so my advice is to treat the concept of communicating with your banker or financier or equity holder as separate from your periodic requirement for seeking finance.

They are two different things.

This brings us back to the bank’s TV advertisement and the issue of how people feel about their financiers i.e. they only want to talk to them when they need them.

And, of course, it works both ways. A business owner will say, quite justifiably, “the bank only talks to me when they’re unhappy”.

You can change that relationship.

How to open the lines of communication There are a number of approaches you should take to develop open and clear communication with your bank.

First, decide how you’re going to keep them up to date with how your business is going.

There’s no right or wrong way.

Your covenants might require you to provide quarterly reports against particular benchmarks in your business. Make sure you meet the timeframes.

Alternatively, communication might be as simple as a regular call and/or discussion a couple of times a year, or a scheduled email providing a summary on business conditions and operations.


Most of all, as a business owner, ask yourself this simple question: If the person in the bank that deals with my business had to answer an internal question about how my firm is travelling in the current economic climate, would he or she be able to provide a confident, comprehensive and up-to-date answer there and then?

Remember, this person is meant to be the champion of your business within the bank, so make sure they’re up-to-date.

Take control

Decide for yourself as a business owner to manage the relationship – don’t let the bank manage it.

It might mean that when you finish putting together your business plan for the year ahead, you call your banker and say: “I know we don’t have to talk to you about this, but these are our plans for the year ahead. Just want to let you know this is what we’re seeing, this trend is happening, this risk might be there, we don’t have any requirement for finance, and we’re moving along okay.”

Be proactive

Make sure you communicate before the bank has to.

If you’re in a hole, if you’re in a tight cash flow position, if a customer hasn’t paid and it’s caused real difficulty in meeting your commitments with your bank or others, talk to the bank in advance and be very open.

Say “this is the problem we’re having in our business today”, but don’t just tell them the problem. Also say “this is what we’re doing to fix it and we expect we’ll have funds flowing by X date”.

It’s all about managing expectation.

managing your banking relationship - why it's not just about money!

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