KEY POINTS:
Business owners all over the country are desperately trying to take advantage of lower interest rates on their borrowings, after the fall in rates over the past six months.
The negotiation with the bank, however, is not going to be pleasant for some. The outcome will be a result of their past relationship with the bank and the company's ability to communicate the risks associated with its future earnings.
If the company does not have good financial and sales reporting in place, these negotiations will be particularly difficult - adding more stress to the already difficult trading conditions.
A bank is a service provider, but with a twist. When a bank lends your business money, it hitches its wagon to your risk profile. It needs information from the business on a regular basis so it can re-evaluate the risk as it changes over time.
The current level of uncertainty about future trading conditions has forced banks to re-evaluate the risk profile of previously solid companies. It's all about risk, and banks would prefer to do business with low-risk profile businesses at the moment.
You can negotiate with the bank, but know that they negotiate within a predefined range and beyond a certain point they will say no - because anything else would be just too risky.
During tougher economic times the range in which they are willing to work contracts, in direct relationship to the risks evident in the economy, your industry and your business.
The best way to negotiate with the banks is to be able to show them that your business has the capacity to repay. Just telling them that you can is not good enough. The argument has to be well constructed and backed up with empirical data that can withstand some scrutiny.
Most business owners seem to resent the bank wanting to know the ins and outs of their business. There is another way to look at it. A business owner should want to understand their own risks clearly and this information should be collected anyway. The information that you provide the bank on an ongoing basis should be a byproduct of what you produce in the regular course of business. You shouldn't be producing any of these reports specifically
"for the bank".
A best-practice business should have these financial reports. At the moment, banks want to see more forward-looking information. They may not have a problem with your financial position now - but may if you cannot tell them how revenue will exceed costs later in the year.
Interest payments are usually not the biggest expense item in a business.
Anger and belligerence towards a bank is counter-productive and risky. Losing a relationship with the bank now could see you trying to get finance elsewhere on less favourable terms or not being able to find anyone willing to take the risk.
Business owners need composure and intelligence when dealing with their service providers, as banks are evaluating their customer base and identifying which businesses are worth keeping and which are not.
If you cannot keep your composure then send in someone who can, either your financial controller, a board member or an experienced consultant.
Many owners feel that only they can get the best deal from the bank, but this is simply not true. Your input in being able to communicate your vision and your control of costs and resources may be vital in the negotiations - but beyond that it just comes down to numbers and risk.
Sadly, the future risk profile of the business may outweigh the number of years you have had a relationship with the bank. If you are in an industry that historically suffers during a recession, such as a restaurant or a tourist venture, then you will want to show the bank that your individual prospects are different from the rest of the sector.
Certain sectors of the economy, such as infrastructure and essential utilities like water and electricity, are considered less risky due to their historical performance in recessionary environments.
Be aware of this when dealing with the bank.
However, if you are able to demonstrate that your business has intrinsic competitive advantage in your industry, that will see you prosper as others fail, you will be seen as a preferred customer of any bank.
When looking forward to your 2009 budget, planning to reduce the interest and principal expense line is just as important as lowering other costs in the business. Make sure your assignment of resources is congruent with the level of savings you will get.
Companies that are offering their best customers extended payment terms are not much different to a bank.
You lend money to your customers by giving them credit. If your customers do not pay on time your business may be in jeopardy. Just as you evaluate your customers' ability to pay, so do the banks.
A lot has been recently written about break costs of longer-term loans.
It is not an emotional issue, but a business issue.
Get the break cost details from the bank and work out how long it will take to break even with new lower rates across your debt portfolio. Then make a decision whether it is worthwhile to break the loan or not. Then get on with what really makes your business tick.
Having good financial reporting in place will help you to renegotiate with the bank now, but more importantly it will help you to run your business better in the future.
It is a long-term game, and those most organised will be able to project a low risk profile to their financing suppliers.
Prove your worth
You can show the bank less risk by:
* Having a good, up-to-date business plan.
* Cashflow projections.
* Strategic plans with objectives in place.
* Being able to communicate clearly the factors that will affect your business in the future.
Craig McIvor is managing director of Corporate Management Advice Ltd.
www.managementadvice.org
