CASH FLOW TIPS: Craig Alexander Rattray offers advice on showing your bank that you are a good risk
Remember, banks only make money when lending to companies, so they are always keen to do so, but only to companies that are a good risk.
To secure bank lending, it is important to show that you and your company are a good risk.
How do you improve your chances of securing bank funding and being viewed as a good risk?
If you can tell the bank:
- Where you are
- Where you have been
- Where you are going
And you can convince them that you have an effective strategy and a good management team to deliver the operational plan, then they will lend to you all day long.
– Show the bank that you understand your financials and, more importantly, your cash flows.
– Show the bank that you prepare good financial information timely and regularly (historic, current, and forecast).
– Keep the bank close to you. Share regular information, ideally share your management accounts package and updated forecasts monthly, as well as having a regular discussion perhaps quarterly.
Tell them the good news and share the bad news – but explain the bad news and what you have done about it to turn it from bad news into good news (or at least acceptable news that does not unduly worry the bank – let them know you are aware of it and are dealing with it rather than hiding from it).
What types of funding do banks provide?
Banks can offer a variety of funding types, some of which are explained briefly below:
Commercial mortgages: Used to purchase property related assets like production facilities, service depots and offices; usually repaid over 20+ years.
Business loans: Similar to mortgages, but not secured on property and usually based on the assets of the company and the future cash flows; usually repaid between 3 and 7 years.
Asset finance: Used to purchase assets used in the business, such as plant and machinery, production equipment, IT equipment, trucks and vans, tools and equipment, office equipment and cars; usually repaid over 3 to 5 years depending upon the asset life.
Invoice Finance/Factoring: These facilities convert your debtor book into cash immediately usually based on a percentage of the invoice value up to 90%; great to finance growing profitable sales.
Overdraft: An agreed excess cash position that the business can operate to, secured on the general assets of the company and occasionally by guarantee from the owners and directors.
Loans and asset finance facilities are repaid over a set number of years and attract an interest charge and agreement fee, too, which is all agreed at the outset and before signing documentation.
Invoice finance/factoring facilities are generally put in place for a period (e.g. 12 months and renewed annually), and attract a monthly interest charge and administration fee. Some providers also offer the ability to insure customer debts if they don’t pay and that attracts an additional fee.
Banks receive their money back and make a small margin on that lending. It is important to match the right funding to the situation that requires the financing. As outlined above there are specific types of financing and structures for different situations, and most banks will adhere closely to this.
As a business owner, it is important that you understand these structures and your obligations with respect to security, repayment and what happens if things go wrong. Unless you have a professional and experienced adviser in your team or a part-time/fractional Chief Financial Officer (CFO) or Finance Director (FD) we encourage you to take expert advice before making any such decisions. You may also want to speak to fellow business owners and learn from their experiences.
We are advocates of debt funding for the right situations as it is can be more appropriate and cheaper, but as mentioned above it does come with risks if you fail to repay on time.
Cash Flow Tips appears here every Thursday
Extracted from Mastering Cash Flow For Business Owners by Craig Alexander Rattray and Jeff Borschowa, available on Amazon, priced £6.95
Craig writes a column for Daily Business on alternate Mondays