Most requests for finance are turned down not because clients are a poor credit risk but because they have approached their bank ill-prepared. Get ahead by communicating the right information first time:
CASHFLOW – Provide data that shows you understand and can manage your working capital (debtors, creditors and stock) and that the cash in your business is sufficient to cover the bank’s interest (as well as other key costs such as tax, dividends and replacement capital). “Cash is king” and even profitable businesses can fail if cash is not managed. Understand your cash movements and you may even need to borrow less.
OUTLOOK – Present forecasts which communicate the amount required, payback period, risk and return to the bank. Figures should be more sophisticated than forecast sales and profit and should ideally show the relationship between profits, your balance sheet and cash flows. Sensitivity analysis is important to help the bank understand when they risk non-repayment. Forecasts should always be based upon the most up to date actual data.
MARKETS – Explain your market. Focus 20% of your efforts explaining what has happened and 80% on what you expect to happen and why. Don’t worry, top economists don’t get this right all the time either. The point is you need to show the bank you have thought about it, considered the likely outcomes and that you have a clear action plan.
MIX AND QUALITY OF CLIENTS – Detail clients by name/industry/region/contract length. The strength of your clients and their ability to pay = the strength of your business. Building your business around one client is high business risk.
UPDATE – Give the bank up to date management information especially if annual accounts are dated. Information should be produced at least quarterly, split into division/region and include profit, balance sheet and cash flow breakdowns. Management information should be used to update forecast/budget data and any differences should be explained.
NEED FOR LIQUIDITY – Show the bank that your business is liquid and can survive. Tell them how quickly you get your hands on the cash and know your debt maturities, credit terms and what cash is tied up in assets. Think beyond a simple current assets/current liabilities ratio and consider your ideal liquidity position. Remember too much liquidity means assets could be generating a higher return elsewhere.
INCOME – Know your financial definitions. Are you talking about gross profit, operating profit, net profit or EBITDA (earnings before interest tax, depreciation and amortisation)? All are common in the financial analysis of businesses. Also ensure you can discuss the seasonality and cyclicality of your industry.
COMPETITION – Tell the bank how you have you performed in comparison to your competitors? Be prepared to discuss your competitors’ strengths and weaknesses. This provides confidence that you are a proactive management team that really understand the business.
ACTIVITIES – Break your business down by activity/division and tell the bank which activities are performing well and which are a cash drain and why. Explain how divisions complement or overlap each other and the strategy for each. Be ready with forecasts if necessary.
TRACK RECORD – Unless starting up, provide at least 3 years accounts to a bank (5 years ideally if approaching a new bank) and up to date management accounts. A bank will need this data for the financial analysis of the trends in ratios and margins. It will also give them confidence in your management track record.
EQUITY, DEBT AND THE BALANCE SHEET – Communicate your risk (equity/directors’ loans) versus the risk to the bank. Know the real strength of your balance sheet by having current market values of assets to hand and full details of debt (including off-balance sheet exposure such as leases and guarantees). Be clear at the outset what security is and is not on offer.
If you communicate effectively any bank will be more confident in your business and in you as a management team. It will therefore be more willing to lend. Be open and never try to gloss over issues it will be respected.
Delphine Paterson is a Qualified Accountant, Qualified Banker and City Analyst who set up Forward Financials to help businesses obtain the finance they need to move forward. http://www.forwardfinancials.co.uk