With continuing talk of the UK and global economies facing challenging times into the foreseeable future many entrepreneurs are concerned as to how much support they can expect from their banks.
There are numerous stories of business owners suddenly finding their bank facilities taken away, previously friendly bank managers turning into the latest enemy, or being dealt a blow with a dramatic increase in fees or interest rates. Whereas previously loans were being granted in a reasonable time frame it’s not unheard of to be faced with a discussion with banks that can go on for months.
But don’t despair! It seems that banks are slowly dipping a toe back into the market, but bank attitudes have shifted – there is much more focus on serviceability… ‘demonstrate to me that you can repay your loan even if times get tough for you.’
Despite a tougher regime there are still some actions you can take to get the bank on your side.
Review What Your Business is About
All the best plans change as the general business climate changes. Nothing ever stays still and the businesses which will survive know that their market, and the way they do business, never stagnates.
As we start coming out of the economic darkness, and before you think about approaching your bank, now is the time to fundamentally examine where your business is today. How did you deal with the rough times? Has your market changed, even slightly, over the last two years? Are customer’s expectations different? Have recent events dented the confidence or purchasing ability of your target market? Will your customers be thinking twice about ordering your all-singing-and-dancing product? Will they no longer be able to accept your high price even taking into account your quality service? Have your costs significantly increased rendering your idea or business unprofitable?
You must not make the assumption that because your business model was viable two years ago that it is still viable today. Be wise enough to re-look at all the underlying factors that delivered a successful business.
Approaching the bank with a business model which has not been reviewed to take into account the lessons learned, is not going to get you the answer you want.
Write a Business Plan
So many business owners still don’t write a Business Plan; they don’t see the value of investing time in researching and writing one. Even in the good times banks liked to see a Plan but now, when banks need more persuading than ever to say ‘yes’, a Business Plan is essential.
Whilst many regard Business Plans as documents written solely for the bank this is not the case. A Business Plan must be seen as a tool which can act as a convincer for the bank and as a control and check for you. A well researched Plan will help you understand the pitfalls of your new venture or expansion; it will highlight the flaws in your thinking and potentially save you from making an expensive mistake.
Before you approach the bank commit time and resources to writing a Business Plan; it may be less painful than you think.
Know Your Business Inside Out
The bank is not going to rely solely on your Business Plan when it assesses your loan request. Many small business owners fail to understand that the bank is lending to them, not the business. You are the business.
In assessing whether your business has the capacity to repay the bank will want to find out as much as they can about you and how well you know your business. This means lots of probing questions. You must be prepared for this. You must research all aspects of your business; you must know your Business Plan inside out; you must know all the key financial aspects of your business.
Testing serviceability of the loan is one of the key assessment criteria. Do you know whether you afford to repay the loan if interest rates went up by 4% or your sales fell by 10%? Test your assumptions under different scenarios; the bank will, so be prepared to beat them to it by having the answers to hand.
Prepare in advance by thinking about what the manager is likely to ask you. What would you want to know about a business if someone was asking you to invest your hard earned cash? Once you have these questions, find out the answers.
Have Something to Lose
The bank will only want to support committed entrepreneurs. These are people who have committed not only their time but also their financial resources. If you want the bank to support your business then you have to show you are prepared to lose something if it all goes wrong. Asking the bank to take all the financial risk is not going to get you the loan. You must be prepared to put your money or other personal assets on the line. After all, if you don’t believe enough in your business to risk your assets, why would you expect the bank to?
Before you approach the bank for a loan, examine your personal commitment to the business; does it look compelling enough to an outsider? Seeing what you are prepared to lose will help the manager come up with a fair assessment of your commitment to making your idea work.
Talk to Your Bank Manager
If you are already borrowing and your business has suffered over the last year you must ensure that you don’t adopt the ostrich position – head in the sand. Problems do not go away by themselves, no matter how hard you try to convince yourself.
If your problems are affecting the business then one of the first people you need to see is your bank manager. The old saying, ‘Forewarned is forearmed’ is so true. No one likes surprises sprung on them and a banker is no different. You must share your concerns. Hiding away from the bank is no solution. A lack of facts or being kept in the dark is a sure way of creating panic and this can lead to incorrect and disastrous decisions being made. Avoid this by talking and informing.
This regular flow of communication is vital if you are likely to need more bank support in the future. How you handle your relationship today is how you and your business will be perceived tomorrow.
Banks can be known for making life tough but you have a part to play. Make it easier for the bank to support you by providing them with all the necessary information they need so that you come across as a business owner worthy of support.