Managing bank finance through the current business cycle,
means satisfying strict credit criteria
Your bank finance Relationship Manager no longer has the same level of influence over your account as they did
before the financial crisis conditions emerged.
In this climate it is essential that businesses pay careful attention to the information they provide in support
of applications for funding, and in the annual review of existing facilities.
Particular attention should be paid to any adverse trends in your industry, and your business, to provide the
bank with evidence that your strategy is adequately dealing with the risks. This is not always an easy thing to do,
but nevertheless essential if the bank's credit analysts are to be kept on side.
Banks are not so interested in chasing new business, rather, they are choosing between low, and lower-risk
lending alternatives, and are looking for opportunities to improve their margin.
Thus to successfully manage bank finance, you must meet the banks on their home turf: Your financial reporting
must be kept up to date, along with realistic rolling cash flows and forecasts. Any "issues" should be flagged in
advance for discussion, rather than allowing disclosure to emerge as a surprise.
Your financials need to show strong, safe and conservative cash flows historically and projected, based on
well-supported assumptions. From a banker's perspective, key statistics which reflect the business's comfort level,
and its ability to manage debt should be monitored closely, for example:
- Interest cover - the ratio of operating profits to interest expense - is an important indicator. Ideally
this ratio should be at least two
- Debt cover - the ratio of earnings to debt - ideally at least three to five
- Debtor days - the average time your customers take to pay
- Inventory days, or stock turn - measures of how quickly inventory is turned over
- Liquidity ratios - such as the Current Ratio which is the ratio of current assets to current
liabilities
- Consistency of margins, and the trends
- Sales cover - the ratio of actual sales to your break-even level
We're clearly living in a new order, where the Bank's risk is more important than the relationship. To
survive, it's essential that businesses recognise the crucial elements, and adjust their reporting accordingly.
What to do when the bank says "no"? Here's one option.
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