Ask theBankDoctor

Ask the Bank Doctor gives you the opportunity to gain independent and expert feedback on a banking issue of importance to you. By publishing questions and answers, we aim to create a community of like minded small businesses owners willing to share banking experiences and learnings for the benefit of others.

Simply type your question into the box below and click “Ask theBankDoctor”. If we think your question may be of value to others we may choose to publish it with our response. We will never publish your name or any information which could identify you. We may choose to abbreviate or re-phrase a question and we reserve the right to decline to respond to any question submitted.

Below are some of the questions theBankDoctor has been asked, simply click on the question to read the answer.

Disclaimer

Responses to “Ask theBankDoctor” questions are provided for information purposes only and should not be construed as specific advice for your circumstances as it does not have regard to your specific banking objectives, requirements and history. theBankDoctor.com.au and Slonim Consulting Pty Ltd do not warrant the accuracy, timeliness or suitability of any information provided and do not accept any responsibility or liability for any loss including consequential damages occasioned by any person relying on the information contained in these responses.

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Guarantees are very hard to retrieve once they have been given but there’s no harm in asking the bank what you need to do to get your guarantee back. If you don’t ask, you don’t get and if the bank really wants to keep your business it just may be prepared to discuss how it could release or at least reduce its reliance on your guarantee. Good luck!

Remember, whether or not you actually sign a personal guarantee for the bank or any other supplier you can still be held personally liable for debts incurred by the company of which you are a director. If you you breach your fiduciary duties, personal assets including the family home could be at risk to cover amounts owing to the bank, the tax office, suppliers and employees.

The only way to be sure your guarantee is never called is to not give it in the first place. If you have to sign a personal guarantee, know exactly what obligations and responsibilities you and your co-guarantors are up for and when you are doing your analysis use worst-case rather than best-case assumption.

It’s really hard to get onside with your bank if you cant find anyone to get onside with. Many businesses are just too small for the bank to justify the cost relationship manager. These companies have little choice but to make the best use of the call centres and online help desks that the banks provide for their smaller customers.

This is one factor outside of your control but there are things that you can do that will eventually make you a better proposition for the bank. These include:

Perform. A good starting point is to perform in accordance with the terms and conditions you willingly agreed to when you signed the bank’s letter of offer. Reasonably enough, the bank expects you to honour those obligations. So you shouldn’t sign up for any deal with which you don’t believe you can readily comply. It’s a good idea to try to negotiate as much headroom as you can in bank limits, covenants and other terms and conditions.

Communicate. Sometimes things don’t go to plan and this is when open and timely and honest communication is most critical. Don’t ignore your banker – an uninformed banker is a major threat to your business. And don’t tell them what you think they want to hear – an ill-informed banker is an even bigger threat.

The best bet is to be straight up with the facts and communicate your plan to remedy the situation. If you don’t come up with a credible plan the bank is likely it will impose a solution on you.

Even when things are going well it’s still important to maintain regular communication. Email is a time-efficient way to communicate, but wherever possible meet or at the very least phone your banker to communicate key messages.

Involve your accountant. Bankers gain comfort by knowing there is a trusted adviser in your corner although the adviser does need to have a sound grasp of your financial position. Bankers can tell very quickly how well an accountant really understands your business. If you think your accountant is not likely to be able to help with the bank this might indicate a need to look around for better accounting advice.

Understand what your banker wants from the relationship and try to deliver it. Find out how their performance is measured and ask, “How can I help you achieve your goals?”  It may be that your banker would really value selling you more bank products (cross sales). Some bankers just don’t want grief caused by you by going over the overdraft limit without advance notice. If you understand what drives your banker, you are at least in a better position to deliver on this. Of course, the quid pro quo is that you want your banker to deliver on your needs too. So think about and communicate what you most value in the relationship.

Advocate. If you have a good relationship with your banker, show your appreciation. There are a number of ways to do this such as referring quality potential customers, giving them a LinkedIn recommendation and providing positive feedback to your banker’s boss and peers. Sometimes this can be done via a response to a customer satisfaction survey and if you give your banker a good wrap make sure he or she knows about it.

Don’t give up. One of the most common criticisms businesses have of banks is that they change their relationship managers so frequently it’s nigh on impossible to build a relationship. Some business owners believe banks move managers on quickly to ensure they don’t get too close to their customers but banks really do want and need their people to develop close relationships with customers in order to better understand and service their needs. When it comes to starting all over again and investing time and effort with a new manager, don’t give up and remember the rewards and risks are yours.

The “all up” interest rate which a bank charges your business is usually a combination of a base rate plus a number of other fees. Agreed, it can be difficult to understand just how your all up rate is calculated because of the wide range of fees banks impose and the confusing names they give to such fees.

The starting point is the base rate. Banks have different base rates depending what segment your business falls into and how important a customer you are assessed to be. And if you think its hard to understand how your bank works out all your fees, it is even harder to make apples with apples comparison with what other lenders might offer because they can all use different terms to describe the various components of the all up interest rate.

If your bank funds your business with “Commercial Bills” or “Bank Bills” the base rate used can also vary in terms of its name and how it is calculated. For instance, some banks will refer to “the banks bill rate of the day” which effectively means whatever the bank wants to charge you on that day. Depending on your size and bargaining position the bank might use a recognised published industry benchmark rate like the Bank Bill Swap Rate (“BBSY”). BBSY is usually used only for larger bill facilities in excess of $1m.

Some banks will also charge a “liquidity” margin on top of the BBSY rate to reflect the full cost of raising funds given that the BBSY rate is effectively a wholesale rate at which banks lend to each other. The liquidity margin a bank charges is sometimes but not always set out in your offer letter. The smaller your bank bill limit is, the higher the liquidity margin will be.

How much you actually end up paying depends largely on how much you borrow and how much bargaining power you have. The smaller, less credit worthy borrowers tend to be “price takers” but if you borrow larger sums and you are in a strong financial position your bank will negotiate on fees and charges.

 

3 Tips re bank fees and margins:

  1. Use what bargaining power you have to get your bank to quote industry benchmark rates wherever possible eg RBA cash rate or BBSY rather than in house benchmark rates which are nigh on impossible for you to question. Even if you don’t have a lot of bargaining power ask anyway. If you don’t ask you wont get.
  2. Check you drawdown and rollover notices as well as your bank statements to ensure that the rates in your offer letter are what you have actually been charged. You should be able to trust your bank but it’s a good idea to work on the adage of “trust but verify”.
  3. If you don’t understand any aspect of the rates, fees and charges, ask for an explanation in writing, even if it is an email advice. Don’t sign if you don’t understand.

 

 

 

 

Cash Flow lending is where the bank lends against the security of your cash flow. That is, the bank is comfortable that your cash flow is string enough to service and repay the debt. Cash Flow lending is often but not always done when there is an absence of “hard assets” such as property for the banks to rely on.

The advantage of Cash Flow lending to the borrower is that it can give access to debt funding even though there may be an absence of traditional security like “bricks and mortar”, plant and equipment and even stock.

The primary requisite for Cash Flow lending is a safe, secure, certain and well established cash flow with the borrower preferably being a longstanding and customer with a strong track record. You also have to be a certain size. Banks generally would not do Cash Flow lending for sums under around $5m. If you tick these boxes, Cash Flow lending might be for you. And if your bank is not interested, maybe another one will be.

Cash Flow lending is not a substitute for equity and is not appropriate for start ups.

“You should have more than one bank” is a common piece of advice given by advisors to their business clients. But whilst this has understandable appeal, it doesn’t work for everyone.

The benefits of split banking

  • Spreads the risk in the event there is a problem with one of your lenders. But bear in mind that whilst it’s good having another iron in the fire there are no guarantees one bank will do something another bank wont.
  • Injects competitive tension. Any supplier is going to be more mindful of issues like fees and security when they know you are also dealing with a competitor.
  • Enables you to pick and choose products and suppliers that suit you. You might prefer the transactional banking platform offered by one bank and the leasing finance options available from another.

But its not such a good idea if

  • You’re just not big enough. What this actually means is hard to strictly define but generally it’s difficult to justify having more than one lender if your total borrowing needs are less than $1m.
  • You don’t have a good track record. In this case another bank is unlikely to do any more for you than your current banker.
  • You can’t meet the security requirements of two lenders. If you can’t split the security in an acceptable and equitable way then it’s going to be hard to have two lenders.
  • You struggle dealing with banks and you feel that having two banks is just as likely to cause you “double trouble”.

Tips

  • A second bank does not have to have equal standing with your first bank. You can use another bank for your non borrowing needs like deposits, credit cards and leasing. Smaller banks are more likely to be comfortable with such arrangements compared to the big banks.
  • Your second provider doesn’t have to be a bank, it could be a specialist lender like a debtor financier or a specialist leasing company.
  • Many businesses find the best way to have two lenders is to have one for your trading business and another for your property or personal needs.
  • Even if you can’t justify establishing a second banking relationship now, you should make yourself known to another bank so at least you remain on their radar.

A second bank or lender can provide protection in the event your main bank is not willing or able to support you but it’s not for everyone. Weigh up the pros and cons and make the decision that’s right for you.

 

Tendering is but one option that would enable you to get a fix on what else is available in the market place but there are other alternatives that you may wish to consider. To an extent it depends on what you are trying to achieve. Would you shift if you actually got a better deal from another bank or are you just shopping around to check if you are getting a fair deal from the incumbent?

If it is the latter, perhaps an easier way is to first raise this issue with your bank and see what they have to say. Maybe pose a question along the lines of “we have been with your bank a long time and are loyal customers, can you check to see that we are getting the best possible deal?” You would be disappointed if you found out that your bank had been taking you for granted by not offering the kind deal it would offer to win a new business which is no better than yours.

If you are going down the tender path, ensure you have all the information in a format that makes it as easy as possible for the banks to evaluate your proposition. If you are thinking of going to tender it is a good idea to enlist the support of an expert party who in addition to knowing what questions to ask is well equipped to interpret the answers.

And remember, price is only one of a number of factors you should take into account when evaluating alternative offerings. More important than price is the “fit” meaning your assessment of the banks understanding of your business and industry and therefore the likelihood of the bank being prepared to support you for the long haul. For instance, in the current environment headroom in limits or covenants can be worth a lot more that the saving of say 0.25% pa on an interest margin.

 

 

You might be surprised by how many business owners actually accept an offer letter from their bank without fully understanding all the clauses. Arguing the toss with a bank after the event is not a smart move. Admittedly, it’s not easy for non-bankers to grasp the complexities of bank terminology but ultimately the onus rests with you to understand exactly what you are signing up for. The most common and expensive pitfalls borrowers fall into when signing bank offer letters are misunderstandings re;

1. Security especially personal guarantees

Despite requirements to obtain legal advice before signing a guarantee, this area remains a source of great angst and financial stress for many guarantors especially in situations involving business partners and non working spouses and family members. It is critical to understand the various types of guarantees and the rights of the bank to call on your guarantee.

2. Margins & fees

There are numerous components which go to make the all up cost of borrowing including base rates, margins, line fees, utilisation fees, unused fees, facility fees, reference fees, undrawn fees & drawdown fees to name just a few. What might on the surface look like an attractive deal could prove to be just the opposite when you really understand all the fees.

3. Expiry & review dates

Loans must be repaid on or before the expiry date. The bank is under no obligation at all to continue to support you. Your bank could refinance the old loan with a new one but increasingly banks are electing to re-coup their capital and then lend it out to other parties considered safer risks. A review date is slightly different in that it gives the bank the right to decide whether it wants to continue to provide the loan. The review process affords the bank the opportunity to ask for the loan to be repaid depending on performance hurdles and other clauses in the offer letter such as “material adverse changes”. Obviously you want to have as much certainty as possible that the bank can’t and won’t pull the loan prior to expiry.

4. Break costs & prepayment clauses

You can get caught out by break costs or prepayment fees if you want to pay back the loan prior to expiry, especially if you have fixed rate or swap arrangements in place which will need to be unwound. Such costs can be so significant as to make repaying/refinancing financially unpalatable. So don’t consider prepaying a loan without being fully aware of any break costs.

5. Definitions of covenants

A slight misunderstanding of the definition of a covenant could see you in breach of the offer letter. Examples might be how shareholders loans or intangible assets are treated when defining “net tangible assets” or whether lease payments or amortisation are included in the definition of “financial commitments”. 

6. Events of review and default

Most offer letters will have events of default and some will also have events of review. As with “expiry and review dates” above, there is a big difference between the two. Try to negotiate for the latter as an event of review will allow you more time to convince the bank that you have things under control. A default on the other hand gives the bank the right to immediately call in your loan or appoint an agent to take control of your business.

Key learnings

Unfortunately due to blind trust, ignorance or time pressures some business owners sign bank letters of offers without fully understanding the contents. Its always worthwhile to have an expert like an accountant or lawyer review the letter before you sign it and if you don’t understand any aspect of the offer don’t sign it!

 

You should be able to trust the verbal and written representations made by your bank but you should also carry out your own due diligence to ensure you actually understand and agree with the bank’s representations. “Trust but verify”.

 

What happens when you breach a covenant depends on the circumstances and the wording of the relevant clauses in the Loan Agreement. If you breach or look like breaching a covenant the bank will be more lenient and supportive if you proactively highlight the situation with a detailed explanation as to how/why the breach has or might occur. But more importantly, the bank wants to see a credible action plan for remedying any breach.

A borrower might be reluctant to provide advance notice of a potential breach for fear of the consequences. I recently met a business owner who foreshadowed a potential covenant breach only to find that the bank responded by appointing an Investigative Accountant (“IA”) to conduct a review at the client’s expense and by increasing the lending margin. As it transpired the breach did not eventuate but by then the costs had been incurred. Needless to say, this business owner resolved never to be so forthcoming again!

For most borrowers however, the risks of not informing the bank in a timely and detailed manner are greater than the risk of engaging the bank. The bank won’t react well if they find out that you have been withholding important information. And they don’t like surprises, especially bad ones. Once your bank forms an adverse view about the competence or integrity of management, it is very difficult to turn this around.

The Loan Agreement will spell out the bank’s rights in the event of a covenant breach. In most cases a breach is an event of default. If the breach is considered minor and the bank can be satisfied it will be remedied say before the end of the next reporting period it may issue a letter advising that it is waiving its rights under the breach.

If the bank is less comfortable it might issue a letter of non-waiver which means that whilst it is not waiving its rights under the default, it is not currently contemplating taking enforcement action. At the same time it might appoint an IA to do a report at your cost. The bank usually but not always follows the recommendations of the IA. At best, they might decide to provide a short term increase or just provide time to enable you to work through the issues. At worst they will seek repayment in full perhaps within a very short period of time. There are a myriad of options in between. For instance the bank may agree not to exercise its rights provided you sell assets, raise capital and/or provide additional security. They may also reduce your limits. To reflect the increased level of risk the bank is likely to increase margins and fees. Further, they could also make it known they are not satisfied with the performance of management which might necessitate some changes in key personnel.

If a breach is fresh and there has been no indication from the bank as to which way it might go, be wary as you might be in for an unpleasant surprise. If you have not already done so by this time, expert advice should be sought. These situations can be very unsettling particularly for family businesses which have only ever enjoyed good times with their bank.

If the bank fails to issue a waiver or a non-waiver within a reasonable period of the breach occurring, a legal argument might be able to be mounted that by its inaction the bank has forfeited the right to call a default under a covenant breach. This is why banks if the bank is seriously contemplating taking action it will usually issue either a waiver or a non-waiver.

Your bargaining power tends to evaporate once a covenant is breached or is about to be breached. The best time to negotiate with the bank on covenants is when the loan is being established. Here are three tips to bear in mind when negotiating covenants with your bank;

  1. Aim to gain as much headroom in your covenants as possible. In the current tough borrowing climate getting your bank to agree on more headroom (such as ICR of 1.25 rather than 1.5 or an LVR of 65% instead of 60%) could be of far greater value than focusing on gaining the lowest possible price.
  2. Try to negotiate the inclusion of a remedy period before the bank can call a default based on a breach. This gives you time to fix the problem before a breach becomes a default.
  3. Make sure you clearly understand the meaning and implications of your covenant definitions. For instance if your business is seasonal, it is critical to ensure that the covenants reflect this. One size doesn’t fit all situations.

Once the covenant suite is in place, you should ensure that accurately completed compliance certificates are submitted in a timely manner. You should also keep the Board fully informed of current and projected adherence with the bank’s expectations. The best way to do this is to include the status of the banking relationship as a monthly (or at least quarterly) board agenda item.

Generally covenants are good for borrowers and their banks but if you wait until a breach occurs or looks like occurring, it’s probably too late. With banking covenants, forewarned is forearmed.

 

 

The standard personal guarantee is an agreement that makes the guarantor liable for the debts of another party.

A several guarantee is where there is more than one party to the guarantee but each party is liable only for their respective obligation. For instance, where there are three equal partners who are severally liable for a debt, the bank can recover only one-third of the debt from each guarantor.

A joint and several guarantee sounds similar but is quite different. A joint and several guarantee means each guarantor is liable for the full debt, regardless of the percentage of ownership the guarantor has in a business. Although the bank cannot recover more than is owed, it can claim repayment of the entire debt from any of the guarantors. This means that if the bank recovers the full debt from one guarantor, that party can then pursue the other guarantors for their share of the debt.

An “all monies” guarantee secures the obligations of the borrower in respect of a specific debt, for example, an overdraft plus all other obligations such as leasing liabilities

Banks treat bank guarantees just like debt because when a guarantee is called that’s exactly what it becomes. Its important to understand that if a guarantee is called in the vast majority of cases the bank has no option but to pay away without delay or discussion. If you don’t believe a supplier or a landlord should be entitled to call on a bank guarantee you are not able to instruct the bank to refuse to pay out. The bank will do what is required under the terms of the guarantee regardless of what you think about the merits of the situation and once they pay out it is you who is liable to re-imburse the bank.

Many business owners think the bank’s risk on contingent liabilities such as guarantees and credit cards is less than “funded” banking products like overdrafts and bank bills but while the bank doesn’t have to physically provide funding when a bank guarantee is issued, they do have to establish credit limits which means they are required to allocate capital against guarantees the same as they must do for funded facilities. And remember too that banks must have the funding in place to ensure all the guarantees they have issued can be honoured on presentation.

Some companies will not accept bank guarantees and request cash retentions be provided instead. Be wary of this as you would be providing your funds to the company that could be lost in the event of insolvency. If a cash retention is required make sure funds are paid into a solicitors trust account so they cannot be used for any other purpose

Interestingly, one of the most common questions we are asked is not “should we have more than one bank?” but rather “how can this be achieved?” What this suggests is that businesses increasingly regard having more than one bank as a sound Risk Management policy but their concern is whether this is practical or even achievable. Certainly there is more work involved in managing multiple banking relationships but the investment of time and effort may one day be considered a small premium to pay if it means having an alternative lender at the ready in case your main bank is not prepared to support you in your time of need. In terms of how you can go about it, sharing of security is not always possible and it can get messy if it is possible.

Other options to consider include :

  1. Separating your business and personal banking relationships.
  2. Using a secondary lender for specialist banking needs like asset finance, trade finance, FX, corporate superannuation or term deposits.

Having an alternative banking relationship takes time and effort to do and maintain but it does minimize the risk associated with having all your banking eggs in the one basket. Ultimately its a judgement call for you to make.

 

Banks tend to regard personal guarantees as secondary or “make weight” security. That is, the primary security is the business and its assets usually held under a PPS (Personal Properties Securities) Agreement. Banks take additional or backup security in the event their primary source of repayment isn’t sufficient to fully clear the amount owing.

The other reason banks take personal guarantees is the moral factor. Banks work on the premise that business owners will do whatever it takes to meet their obligations rather than face the humiliation of becoming publicly bankrupt.

Many guarantors are under the false impression that a bank can call on a personal guarantee only once all other avenues of recovering a debt, such as selling the business have been exhausted. This isn’t correct! Banks have the right to call on a guarantee as soon as a borrower is in default, although most banks do in fact seek to recover their debt from the assets of the business and then look to the personal guarantors for any shortfall.

 Your home and personal guarantees

Ideally, banks want personal guarantees from parties who hold tangible assets in their own names, especially residential real estate. If the home is in your partner’s name, the bank will likely insist on taking a personal guarantee from your partner. More grief and litigation flows from guarantees given by spouses particularly where that spouse owns the family home.

Trying to sort this out after a guarantee is called can be a nightmare. While banks are obliged to make sure the guarantor knows what they are really signing, the guarantor must also take responsibility for ensuring they fully understand the implications of signing a guarantee.

 

Historically banks relied on property security as protection from incurring a loss if a borrower defaulted. But often by the time the bank became aware of a problem, it was too late and the appointment of receivers or worse still liquidators was the only viable option to recover the debt. It is widely recognised that banks are not well suited to sell businesses or properties so you should do all in your power to avoid such outcomes.

In recent times banks have become much more focused on cash flow as the main barometer of the capacity of borrowers to service and repay debt and have built covenants around these drivers to provide early warning signs of adverse trends.

It is in the best interests of both you and your bank for any looming financial difficulty to be highlighted early as this maximises the opportunity to work collaboratively to identify and remedy problems before it is too late.

MAIN TYPES OF COVENANTS

Banks will generally rely on three main covenants for trading businesses;

  1. Interest Cover Ratio (“ICR”) which measures the extent to which cash flow from trading is able to meet interest expense. If you use asset finance more than working capital or term debt, banks will often prefer to adopt a Financial Charges Cover which takes account of the cost of leasing and hire purchase finance. Banks generally want to see an ICR of a minimum of 1.5 times. Anything less is likely to be too tight for the bank’s comfort levels. By definition, at 1 times cover you are working solely to meet interest commitments to the bank
  2. Debt/EBITDA reveals how many years of cash profits (before interest, tax, depreciation and amortisation) are required to cover debt. Generally banks like to see a Debt/EBITDA ratio of not more than 2 to 3 times although this can vary depending on the borrower and the industry.
  3. Capital Adequacy Ratio (“CAR”) is a common gearing covenant and measures total assets against total equity although in some cases the definition is “total tangible assets to tangible equity”. Generally banks like to see CAR at a minimum of 35% to 40% and often as high as 60% again depending on the borrower and the industry.

For property investment borrowers the main covenants banks apply are an ICR plus Loan to Value Ratio (“LVR”) and Weighted Average Lease Expiry (“WALE”).

LVR measures debt as a percentage of the value of the property. Currently banks look for an LVR below 65%. They may go as high as 70% in certain circumstances but in other cases they won’t go beyond 60% or even 50%. For vacant land, borrowers might be lucky to even get 50%.

WALE measures the length of time future rental income can be assured from existing lease agreements. Banks are uncomfortable in providing funds for a term which exceeds the WALE.

NEGOTIATING BANK COVENANTS

Your bargaining power tends to evaporate once a covenant is breached or is about to be breached. The best time to negotiate with the bank on covenants is when the loan is being established. Here are three tips to bear in mind when negotiating covenants with your bank;

  1. Aim to gain as much headroom in your covenants as possible. In the current tough borrowing climate getting your bank to agree on more headroom (such as ICR of 1.25 rather than 1.5 or an LVR of 65% instead of 60%) could be of far greater value than focusing on gaining the lowest possible price.
  2. Try to negotiate the inclusion of a remedy period before the bank can call a default based on a breach. This gives you time to fix the problem before a breach becomes a default.
  3. Make sure you clearly understand the meaning and implications of your covenant definitions. For instance if your business is seasonal, it is critical to ensure that the covenants reflect this. One size doesn’t fit all situations.

Once the covenant suite is in place, you should ensure that accurately completed compliance certificates are submitted in a timely manner. You should also keep the Board fully informed of current and projected adherence with the bank’s expectations. The best way to do this is to include the status of the banking relationship as a monthly (or at least quarterly) board agenda item.

Generally covenants are good for borrowers and their banks but if you wait until a breach occurs or looks like occurring, it’s probably too late. With banking covenants, forewarned is forearmed.

 

This is a good question and one that is not easy to answer without a detailed understanding of the business’s position. Tendering your banking business can produce a number of benefits, the main one being a better deal. At the same time, this can be a time consuming, frustrating and expensive process that fails to deliver any better outcome.

The circumstances in which you might consider tendering you banking business include:

  • You’ve had a major falling out with your bank.
  • You have lost trust and confidence in your bank.
  • Others (banks, friends, advisors etc) are telling you that better deals are available.
  • You have only ever been with one bank and have never before shopped around.

To help you decide whether tendering would make sense for your business, consider the following six questions:

  1. What do we really want to achieve?

Do we really want to change banks or just find out if we are getting a fair deal? If it’s the former then a tender may well be the best approach. A formal bank tender is a process where selected lenders are invited to submit proposals based on a comprehensive package of information.

If you just want to make sure you are getting a fair deal there are quicker and cheaper ways of doing this. For instance, pose a question like “we’ve been loyal customers for a long time but I’ve heard of better deals being done for lesser customers, would you please have a look at our file and tell me we are getting the best possible deal?”

  1. How attractive a customer are we?

Before going to tender you should do the numbers to see how attractive you might be to another bank. It may be that you’re already on a good wicket. Going back to your bank cap in hand after finding no other bank will take you on places you in a precarious bargaining position.

  1. What are the downsides in running a tender?

Tendering can be expensive and time consuming. If you are going down this path ensure you have all the information in a format that makes it easy for the banks to accurately evaluate your proposition. As a minimum this means business plan, results for the past three years and projections for at least the next year.

  1. How do we evaluate tenders?

If you thoroughly conduct the process of obtaining proposals you then need to be sure you can then meaningfully evaluate them. There is a raft of confusing bank terminology particularly around fees. Ask as many questions as necessary to ensure you’re comparing apples with apples.

Remember price is but one factor. Arguably more important is the “fit” meaning how well the bank understands you, your business and industry. For instance, in the current uncertain environment having headroom in your overdraft limit or a loan to value ratio covenant could be worth much more that the saving of 0.10% pa on your interest margin.

  1. When is the best time to conduct a tender?

Business owners usually make a decision tender as a result of an event. It could be the rejection of a loan application or having your pricing increased but the best time to look around is when you don’t have an immediate issue. This way you can focus on the big picture rather than being worried about a short-term outcome.

  1. Am I acting with my head or my heart?

It’s never a good idea to allow your heart to lead you in making decisions on your banking relationship. Don’t say or do anything you may later regret. Take your time and be guided by your head not your heart.

Summary

  • Quality long term customers can be overlooked by banks.
  • If you think you deserve a better deal do something about it, don’t expect the bank to come to you.
  • But do your homework first. Understand how much fire power you actually have.
  • Ensure you evaluate tender proposals on an apples with apples basis.
  • Tender when you don’t have an immediate need.
  • Use logic not emotion.

 

Business owners approach family (or friends) to help finance their business for a range of reasons. It might be that there is an immediate opportunity but there isn’t the time to go through the process of applying for a bank loan or it might just be that the bank has said “no”.

Whatever the reason, borrowing from family or friends is increasingly common these days and with interest rates at historic lows, there are cashed up individuals looking to lend to and/or take equity positions in businesses owned and managed by people they know and trust.

But borrowing from family or friends certainly has some risks, and big ones too!

A significant added dimension here is that if the business doesn’t do well and the loan can’t be repaid you will experience angst and pain both on a business front and a personal level. Its hard enough for an owner to deal with a struggling business but the added burden of managing a relationship with a family member or a friend who has lent money to your business makes things even tougher.

So is borrowing from a family member or friend a “no go” area? Not necessarily. It can and does work. We recently encountered a situation where a business owner who was under pressure from his bank entered into a short term borrowing arrangement with a well heeled friend to buy time whilst the business was restructured and returned to profitability. In this case it worked out well because the friend was refinanced with bank debt once the bank was satisfied that a profitable trading record has been re-established.

Whilst there are risks in doing business with family or friends, such arrangements can be beneficial to all parties although it is crucial that all aspects are clearly understood and formally documented.

What security is offered and interest rate you pay will be negotiated between the parties. If you cant get a loan from the bank it suggests you should pay a higher rate but your potential lender might not want or need to be compensated in such a manner. You could consider other options like issuing equity as an alternative to having the loan repaid.

There are always risks in borrowing be it from a bank or a family member or friend. The important point is that all parties fully understand these risks and formally document how the arrangement will work.

 

 

One of the great benefits of Debtor Finance is that it enables businesses to access funds to support continued growth without the lender imposing gearing covenants. SMEs can get leverage of up to 90% on their debtors whilst banks rarely go over 70% on property (unless it is a against a home). And speaking of homes, another advantage of Debtor Finance is that borrowers usually do not have to put their homes up as security. Not only is this a terrific risk minimization strategy it has another advantage in that it affords the borrower the opportunity to diversify its banking relationships. You can get Debtor Finance from one lender plus a property loan from another thereby eliminating the risk of being exposed 100% to one bank.

The regional banks and the specialist Debtor Financiers are making big inroads into this market and whilst it is true funding costs are higher than traditional bank debt, these businesses are prepared to pay for access to additional funds and the other benefits such as reduced bank reliance.

To be called into the bank to be introduced to people from the credit department or the “watch loan” department could be one of the worst experiences any business owner will have. Here are 5 tips to help if this were to happen;

  1. This entire process can be extremely confronting and emotionally draining as business owners struggle to reconcile how their long standing supportive bank can appear to change its attitude so quickly. A not infrequent reaction is “they made me feel like a criminal”. Whilst business owners take it personally you need to understand that the bankers are just doing their job.
  2. Have a trusted and expert advisor with you and consider instructing this person to speak on your behalf especially if you don’t know exactly how to behave and respond or if you are worried you might not be able to control your emotions. As hard as it might be, blurting out what you really feel like saying is not going to help your cause.
  3. Resist any temptation to immediately go over the head of the people you are talking to. Banks close ranks to support their people who are doing the dirty work. You don’t want to get the new banker offside and don’t count on your old Relationship Manager’s support as they will have no control over the process
  4. Rather than immediately offer a spirited defence, seek to understand the bank’s precise concerns and what they are looking to do next.
  5. Accept that when you are in default with your bank you are not in a strong bargaining position and one way or another the bank will get its way. The appointment of Investigative Accountants (at your cost) and increased fees and charges are usually part of the bank’s plan.

Broadly there are two possibilities here:

  1. You dont make enough money for the bank on a risk return basis to justify any better treatment than you are currently getting. The unfortunate reality for many small to medium sized businesses is that their banks don’t see that providing a higher (more expensive) level of service is going to produce a commensurately higher return for the bank.
  2. Alternatively the bank for a whole range of reasons is not paying you the respect you deserve based on how much you do or can make for them.

If its the former, in simple terms, your options are limited. You may want to look elsewhere including regional banks or a non bank source of finance but in the end you may have little choice but to put up with it, at least until you get yourself into a better bargaining position.

If it is the latter, you do have alternatives and you should be exploring them.  But don’t “burn your bridges” with your current bank and when you look elsewhere give them the same opportunity you would give to a potential new bank.

This is a common complaint raised by many small business owners. Banks are can take significantly longer time to make lending decisions these days. Credit standards have tightened and combined with cuts in staffing and centralising of credit decision making, it is not uncommon for borrowers to wait up to 2 months and even longer for a decision.

In defence of the banks, a contributing factor is often the borrower not providing all the information the bank requires up front which might mean your application goes to the back of the queue pending receipt of the necessary information.

In your case I suggest you contact the bank and:

    • Ask if there is any information at all that the bank still requires in order to make a decision.
    • If the answer is “no”, then ask “when can we reasonably expect a response?”

Confirm in writing any verbal discussions and continue to maintain regular contact.

But be careful about trying to force the bank to make a decision. Banks want to be 100% sure that everything is in order before approving a loan so if you insist on a quick decision, you will get one but it might not be the one you are looking for!

Price is an important but by no means the most important factor. When it comes to building a strong relationship with your bank the most important factor is the bank’s understanding of your business and industry. But this can be quite arbitrary and difficult to quantify plus you only ever find out how strong the relationship really is when the “chips are down”.

Looking at more tangible or measurable factors that are important, I would suggest that you pay close attention to maximising the headroom in your bank limits and covenants. When your time of need arises, having undrawn facilities and/or some room to move (or “wriggle room” as the banks call it) is going to save you a lot more than say a 0.05% saving on a lending margin.

 

Most bank guarantees are priced on the basis of;

  • An Issuance Fee expressed as an annualized percentage of the face value of the guarantee when it is issued plus
  • A Service Fee expressed as an annualized percentage of the face value of all the guarantees on issue.

Some banks may also charge a Line Fee expressed as a percentage of the full limit whether that limit is used or not.

Overall your bank guarantee fees should be the same as the fees you pay for your funded debt. So if you have a bank bill on which you are paying line and usage fees of say three per cent you should not be paying more than this for your bank guarantee fees.

And if your bank guarantees are 100% cashed backed while the rest of the debt is secured by property or trading assets you may have a case to argue for a lower rate on your guarantees. Whether you prevail will depend on your bargaining position and skill.

Whilst pricing is important it is advisable to negotiate some “headroom” in your guarantee limit (provided the undrawn component does not have to be cashed backed). There are times when you need to establish a bank guarantee quickly and if you don’t have room in your limits, your banker will need to make an application to the credit department. Unfortunately, decision making at some banks can be quite slow so it’s a good idea to have some leeway in your bank guarantee limit.

Very few businesses these days can borrow from banks on an unsecured basis and this applies regardless of whether your need is for an overdraft or a guarantee. What kind and how much security the bank requires is determined by the strength of your bargaining position. If you run a very profitable and lowly geared business where the bank has more than adequate security and you can demonstrate a strong history of servicing and repaying debt, it’s likely they will be provide bank guarantee limits as part of the overall security package which might include a General Security Agreement plus directors guarantees.

On the other hand, if you are just starting out in business or your financial position and history is not so strong, your bargaining power is weakened and if the bank insists on guarantees being 100% cash backed, your options are limited.

 


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