How to borrow money from your bank

It is common for a good business to go to the bank for a loan and get turned down. The reasoning seems mysterious and the borrower is often at a loss to understand what the problem might be, when other business owners seem to get funds easily.

From the other side, business bank managers despair daily at the quality of the loan requests they get. Requests that are from established businesses, from MD's or Chief Executives who, supposedly, know their stuff. There is often an expectation that no reasonable bank manager could possibly fail to see why it is a good idea to hand over a big pot of money.

So what is going wrong ? Why is there a mismatch between the expectations of the bank manager and those of the borrower ?

Here are some reasons :

Banks are often given limited information and questionable financial data.

The banks have cut costs, so their relationship managers are spread pretty thin. They have a lot on their plate and need the decisions to be made easy. Requests that are too much hard work to assess are easier to reject. What the banker gets given, day in and day out, is very poor quality business plans. Plans with wildly optimistic sales forecasts; plans that don’t add up; plans with no balance sheet or cash flows and worse. Funding requests often leave a bad first impression because:

• Some managing directors are just too brainy - so clever they cannot understand why the bank manager cannot see what is so obvious to them;
• Some MDs are just lucky. For them, business is a no-brainer. It just works. They can't explain it. Except someone needs to, as the bank manager doesn't get it;
• Ordinary MDs who are good at their stuff, but don't place much priority on the finances, as the basics are in place. They are a bit busy and a bit phased and perhaps don't take their presentation to the bank as seriously as they should;
• The ‘on a wing and a prayer’ MDs, who really haven't got a clue about the risks they want to take on. They operate with coping strategies and coping strategies don't make a lender want to lend;

What does the bank want to see?

What will make it easy to get a decision in your favour ?

1. Confidence that he or she will get the money back. This translates into security - charges and or guarantees with good asset backing, possibly key man insurance;
2. Confidence that you can service the interest and repayments. In other words, a strong cash flow. Strong cash flow can cover security (1 above) as well;
3. Confidence that you know your products and markets;
4. Confidence that there is a skilled management team in place;
5. Confidence that there is solid management information and proper financial controls in place.

There is a theme there, which you may have picked up on. You need to provide confidence that you know what you are doing and that they will get their money back.

How can you instil confidence ?

The checklist :

A) The amount and the reason for needing it;

B) A plan for repayment showing how much and over what period;

C) Up-to-date financial statements : a profit and loss account and balance sheet, ideally showing comparisons to budget. These need to have been produced by a competent person - the bank manager can tell when they have been produced by someone who doesn't really know, for example, how a balance sheet works. If it is a new bank, then the history will be needed as well, which means the financial statements for the last three years;

D) A business plan. If you are asking for a large loan, then you will need to provide good context. A brief history of the business; the names of the key people and their skills (including who is keeping the books and who is ensuring financial controls and producing management information); the markets and products and how you bring the two together; the infrastructure that exists to make the business happen; any relevant key events or tasks; highlight the major risks and any changes the business faces;

E) A budget or projection covering at least the next twelve months, showing how your expect your plans to translate into financial reality. Typically this will be a profit and loss, a balance sheet and a funds flow statement.

If you are going for some form of debtor finance, perhaps invoice discounting or factoring, then the bank will want to take a detailed look at your debtors ledger and credit control procedures. They need to satisfy themselves that those receivables really are receivable and that your business is competent at collecting them. They will be looking for things like a diversified customer base, on-going clients, good credit control procedures, the right trading terms and conditions.

If you are not good at this stuff, then this is where we can help. We are good at it and we can help you sell your story to the bank and greatly increase the confidence of the bank managers.