Canadian banks are among the most heavily regulated institutions in the world and must comply with constantly evolving capital, liquidity and systemic risk regulations. They have fiduciary duties to depositors and shareholders—which includes most Canadians, and to their credit they collectively paid $7.9 billion in taxes and provided financing to 1.6 million SME businesses (CBA, 2013).
Challenges Impacting Business Owners
In recent years, the commercial banking industry has shifted its focus from the trusted Advisor model into the sales manager model. This negative development is compounded by the replacement of long-tenured bank managers with short-tenured managers who are typically on the job for an average of only three years. Akin to “revolving doors”, this trend has engendered a common sentiment among business owners—frustration that their bankers no longer understand their business. A few banks responded to this grievance by introducing industry-specialized managers with some success, but left the core revolving door issue unresolved.
Despite these challenges, following the practical rules below can alleviate frustrations and transform bankers into business partners.
- Keep Financial Statements Up To Date. Bank reporting requirements are typically between 90 and 120 days after fiscal year end. Keep your accountant on track. If there will be a delay inform the banker. A good accounting system that instantaneously generates year-to-date financial statements, A/R, A/P and inventory come in handy.
- Keep Business Plan Updated. If a comprehensive plan does not exist, prepare a two- to five-page summary outlining crucial information such as: business history, background of owners and managers, differentiated products and services, industry and competitive landscape, short-term and long-term strategies, marketing plan, etc.
- Prepare Financial Projections. When a business is growing and an additional credit facility may be necessary, always have financial projections ready. Bankers typically like to see monthly projections for the first 12 months, then annual forecasts thereafter. Explain underlying assumptions behind variables.
- Maintain Healthy Financial Ratios. Make sure financial ratios are “onside” especially if financial covenants are stipulated in the loan agreement. Banks have different formulae for calculating ratios, and bankers can inadvertently impose covenants that are difficult to adhere to. Understanding those covenants is crucial since any breach can have serious ramifications. First offenses are typically tolerated. Communicate any potential breach immediately and explain workable remedies.
- Understand The Financial Statements. This is true both during initial discussions with the bank and annual reviews. If the numbers are not clear, ask your accountant for clarification.
- Material Financial Deterioration. Be forthcoming about any potential financial deterioration. Your banker will likely react more positively the sooner he or she finds out. It demonstrates your genuine concern about protecting the bank’s money and maintaining a good relationship. This also allows the bank to negotiate mutually acceptable remedies. When clients suffer severe cash flow issues I recommend deferral of principal payments on term loans.
- Be Proactive in Communicating Credit Needs. While imperative to communicate negative developments, it is also advisable to communicate positive developments.
- Pick The Battle. A good understanding of “concessions” improves relationships with bankers. Remember that banks work within certain parameters and will determine terms and conditions of financing based on a company’s risk profile, a variable that can change dramatically from year to year especially in a cyclical industry. Expect to pay more if ratios are just above bare minimum, but strong financial ratios can provide flexibility in negotiating interest rates.
- Bankers Are In Tough Positions. Bankers have internal battles to fight, sometimes with underwriters or worse, with credit approvers, also known as Risk or Credit Managers. They are often caught in the middle and if pushed too hard may not be receptive at all.
- Hire an Advisor. If your company has no CFO or Controller and your accountant does not provide assistance in dealing with banks or preparing a business plan, hire an external consultant. Not only does this improve the chances of getting approved and improve bargaining power, it gives the bank additional comfort that the business owner is not alone in managing his or her financial matters. Advisors can not only make banks more receptive to a financing request, but also to lower interest rates and a waiver of bank fees.