By James Nicholson-Smith, Business Development Director & Managing Principal, West Midlands Region, The FD Centre
FDs and FCs are often expected to manage the relationship with the bank on a day to day basis. In the current climate, this role has become more critical to the business. At the FD Centre, where collectively, we have over 2000 career years of being Finance Directors, we have collected some top tips for FDs and FCs who are struggling to make headway with their bank relationship:-
Buying money should be treated in the same way as buying any other commodity based product from a supplier which the company considers is critical to its survival. The product you are buying is cash - which oils the machinery of business. FDs and FCs need to keep this relationship in perspective, at all times, and always nurture an alternative supplier - just in case. It is also advisable to make the incumbent bank manager aware that you have alternatives, if the service level falls or prices increase.
In many ways, the hardest part of managing the relationship with the bank, is managing the expectations of the other members of the management team. It is always worth reminding the rest of the management team that banks do not invest money; they lend it. This is a really important distinction because banks have to be repaid. This is why bank’s assess the risk of not being repaid very very seriously and if repayment is in doubt, the security they can fall back on, becomes of more important.
Bank managers rely very heavily on the information they are provided with by the finance team of a business. Where such information is reliable and timely, the ank manager and his credit team are reassured that the business is under control and they are not exposed to a risk of not being repaid. However when the historic information or the reliability of your forecasts are questioned, the underlying questions is about the ability to repay and security and not a personal attack on your credibility.
A good manager can also be a good ally. We have always found that the good managers can be quite perceptive in the questions they are asking. In your role, you may be so deep in the detail that it is difficult to see the wood for the trees. It is often worth spending a few minutes reflecting on the questions your manager has asked you to see whether there is an issue that needs more attention than you are giving it eg a management team issue.
Security issues, like personal guarantees, are always difficult conversations between the bank manager and the management team. In many cases the bank manager knows that a personal guarantee is not a deal breaker but he/she has to ask. You should always ask why the security is required. This should flush out the real concerns within the forecast which support the repayment ability of the business. If these are not dealt with properly, then the bank will walk away if there is insufficient security. If security is reasonable, you should consider whether individual guarantees in proportion to share holdings are more reasonable than joint and several guarantees. In the end, the bank has to accept that the risk and reward for each director must be reasonable.
Fees and interest rates are a hot topic at present because banks are pushing up fees and their margin on interest rates. If you are under pressure on pricing, then you need an alternative to ensure you get the best deal. Bank managers are under pressure to increase annual fees as well as margins: their bonuses depend on it. They will often use “credit” as a cover for the requirement for more fees. It is more reasonable to relate this fee to the amount of work the manager has had to put in to the renewal.
The bank is a machine that consumes financial information about its customers. If you starve that machine, it will become irritated and irrational. More often than not, delays in receiving financial information is the root cause of a deteriorating relationship. To avoid this, you need to provide the bank with a full finance report every month setting out the financial position and latest forecast and a commentary, irrespective of the current funding requirements of the business. On the whole, the bank wants to support its clients, so feed the machine. If you don’t need their help now, you probably will at some point.
Finally, but by no means least, bank managers are human beings, just like you and me. They like to be liked and they really want to be trusted. In the most difficult of circumstances you often see how good a relationship manager really is. At this time you need to tell the manager how good he has been. If you can, recommend him to another business eg a supplier or a customer that may have told you of relationship issues with their bank. An introduction to another potential customer is the gold standard in brownie points.
To make sure you have the right team in place to manage your business, contact The FD Centre and ask for a free financial health check, carried out by an experienced Finance Director. If you are interested in finding out more please visit www.thefdcentre.co.uk