How to build a relationship with your bank

  1. Banks
    Clive Lewis ICAEW

    Clive Lewis ICAEW UKBF Newcomer Full Member - Verified Business

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    The economic downturn in 2007 and the subsequent recession revealed that bank credit application procedures for vetting businesses were not robust enough to withstand a challenging economic situation.

    The banks became much more cautious in their lending to business. In addition, the authorities imposed harsher regulations regarding the amount of capital banks were required to keep to help withstand economic shocks. New rules meant the bank’s lending to smaller businesses required keeping significantly higher capital as they were regarded as riskier.

    So, with the prospects of another downturn, what can businesses do if they require finance to grow and how can they deal with banks that face these challenges?

    Key questions

    When considering raising finance a business must be able to answer the following questions:

    • How much are you looking to raise?
    • Are you prepared to offer security over a business or personal asset?
    • How will you pay the finance back?

    Consider all the financing options

    There is a wide range of finance available from a large number of providers and it is essential that businesses match the financing to their requirements. Many accountants can provide details of alternative lending and check applications.

    Bank finance is still the main source of finance for small businesses

    The major banks still account for over 80% of lending to businesses. If you follow a few rules you should be able to access finance through your bank, but do get advice.

    1. A business bank account is a window into the business, so keep it under control

    How a business conducts its current account is closely monitored by its bank. Always keep up-to-date records of transactions going through the account, access statements online and regularly reconcile with your financial records. It is essential that businesses know the current account balance and how they anticipate it will change at least over the next month.

    2. Allow at least a month to get finance from a bank

    Banks are more cautious and credit decisions are usually made at regional bank or head office level, so it takes a bank time to send applications to the relevant levels within the bank, respond to questions and reach a decision.   

    3. Banks require much more information

    Banks require a great deal of information to decide whether to lend money. This will include past financial statements, more up-to-date management accounts and forecasts of future trading, cash flow and balance sheets covering at least the next two years.

    Many banks offer free software packages to produce these forecasts, but if you are unable to work with spreadsheets an accountant can help develop the required forecasts. Make sure you have all the required information before submitting an application.

    4. The business risk profile matters

    Banks assess the risk of lending to businesses by reference to behavioural scoring data (how bank accounts are run, facilities repaid etc.). They also access information from credit reference agencies such as paying bills late and court judgements. If the business is a limited company, finance providers will look behind the company at the directors’ credit history, particularly if the company has a limited trading history.

    5. Banks will communicate their credit decision

    When the bank reaches its decision it will communicate it to the business. This is best done in a meeting where the business can ask questions, but if the decision is to refuse credit or there are terms or conditions attached to the offer which the business is unhappy with you must get the decision in writing.

    In the event of a refusal, the bank is required to point the business to alternative sources of finance which they consider might be appropriate. Many big banks now refer businesses that were unsuccessful because of a poor credit score to the Community Develop Finance Association (CDFI) which can help businesses to become finance ready. 

    6. Understand the finance on offer and the terms and conditions which apply to it

    It is important to understand the difference between a loan and an overdraft. A loan is for a fixed period repayable over the length of the loan. It can have either fixed or variable interest rate on the outstanding amount. Loans are normally secured by a charge over business or personal assets. Often a loan has conditions attaching to it (‘covenants’) which can trigger a demand for immediate repayment if they are not met.

    With an overdraft the lender offers a facility to go overdrawn up to a limit with an agreed interest rate, and this is probably secured on personal or business assets. The business can dip in and out of the facility up to the limit. Overdrafts can be withdrawn on demand.

    7. Consider appealing if you are refused credit or have issues with the terms of an offer

    All the main banks now have an appeals process under which a business can appeal against an adverse decision. The appeal must be against a formal application for credit (which is why a letter outlining the bank’s decision is essential). The appeal is sent to a separate team within the bank and the bank has 30 days to respond. In the first two years of the appeals system 40% of decisions were overturned often after the business provided more information

    If you receive bank finance:

    1. Keep the bank informed of significant events and major changes to forecasts

    Finance providers do not like surprises, so it is always advisable to keep your relationship manager in the picture on major events such receiving (or losing) a big order. If the news is bad try to have some good news to tell the bank at the same time. Be prepared for the inevitable questions regarding the impact of the event on profits and cashflow. Sometimes bad news such as losing an order will have a short-term positive effect because less working capital may be required.

    2. Prepare for reviews with the bank

    Banks will want to review a finance facility at regular intervals – often quarterly or annually. Be fully prepared for these meetings and consider the facility from the bank’s perspective. Has the business met the planned repayments? Is the security worth as much as originally stated? Are the forecasts of future trading robust? Is the facility adequate? Will you want to increase it or seek alternatives to replace or work in conjunction with the facility? What will be the bank's reaction to a request to share security with an additional finance provider?

    3. Review alternative sources of finance

    It is advisable to keep contact with other finance providers to ensure the current financing offers the business good value. The major banks have introduced a guarantee that current accounts can be moved to other providers within seven days, so switching is not the problem it once was.

  2. Brian Holt

    Brian Holt UKBF Newcomer Free Member

    14 1
    Isn't the question why would I want to build a relationship with my bank? There are so many Alternative Finance (AltFi) sources available to businesses, many of which will give you an answer to your loan request in a matter of days as opposed to your suggestion that you give your bank a month's notice of a requirement; and with better and less onerous terms.
    Posted: Sep 2, 2016 By: Brian Holt Member since: Apr 5, 2006
    Francois Badenhorst likes this.
  3. Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

    91 18
    Have you used any AltFi services, Brian? What would you reccomend?
    Posted: Sep 2, 2016 By: Francois Badenhorst Member since: Aug 25, 2015
  4. Mark T Jones

    Mark T Jones UKBF Big Shot Full Member

    3,614 1,091
    There are
    Iterally hundreds of alternative lenders out there - but the harsh reality is that banks will remain the core source of business funding, not least because of the economics of how they are funded

    Unfortunately, the big flaw in the notion of 'building a relationship' with your bank is that most banks are set up to avoid relationship building - personal contact for small business owners is almost non existent

    Our customers' key complaint about they banks isn't about terms and conditions, but complete lack of response to requests (it is a matter of fact that several banks will ignore finance requests that don't meet their criteria in order to keep their KPIs looking good)
    Posted: Sep 4, 2016 By: Mark T Jones Member since: Nov 4, 2015
  5. ldjames

    ldjames UKBF Regular Full Member

    324 44
    Also, consider the cost of producing all of the documentation a bank might need and the time spent communicating it to them. Add that to the cost of the loan or overdraft before comparing with alternative avenues for finance.
    Last edited: Sep 6, 2016
    Posted: Sep 6, 2016 By: ldjames Member since: Nov 14, 2013