As published in the Institute of Directors Growing Business Handbook (5th Edition)
There are two fundamental truths that go to the heart of the relationship between the growing business and its banker or other lender:
Managing those two fundamental dynamics is the key to growing the business both quickly and successfully.
A bank customer once expressed it very succinctly: 'it's your money'. It is a remarkably widely held belief that, in particular, the high street banks are obliged to lend when presented with a good case, whatever that may mean. Therein lies the problem - every lender has to make a subjective judgement on the wisdom or otherwise of lending to a particular customer for a particular purpose.
As an aside, it is important to remember that the most mathematically based tools for assessing credit risk, whether rating agency models or personal credit scoring, are merely applying a centralised judgement of the weight attaching to various risk factors. For the majority of businesses, that judgement is still exercised on a devolved basis by bankers meeting their customers every day. The very simple reason is that the governing factors in the decision-making process remain too complex to be reduced to a tick box solution.
However, the corollary is that the bank's corporate customer will actually serve itself best by understanding how the imaginary tick box would work and acting accordingly.
Moving a bank account that is in credit can be complicated, potentially very expensive, and the truth is, it does not happen very often.
For the growing business it is even worse. By definition, there will be times when it needs to gain a tick in the lender's more judgmental or subjective boxes in order to maximise the availability of borrowed money. They are the moments when knowledge of the business and effectiveness of the relationship may be of particular importance.
The government has tried to help out here, following the Competition Commission investigation into banks supplying the small and medium-sized enterprise market. As a stop gap they are insisting that banks either pay interest on current accounts or provide free banking facilities, but of the longer term objectives to increase competition four are especially targeted at this area:
Business representatives have broadly welcomed the proposals, but there is a snag. Making the payment of interest on current accounts compulsory will remove the key advantage offered by new banks entering the market - and thus inhibit their opportunity to develop critical mass before seeing a competitive response from the market leaders. They are no longer flying below the radar!
Unfortunately, for the growing business, the two main problems are not dealt with that easily. Using the full range of banking services available also means much to unravel if a change is to be made. That takes time, which is certainly costly and may be better spent on more directly productive issues. However, more importantly, transferable credit histories do not convey the sense of confidence that can be built up over a period of time. Those businesses that have benefited from that banker's confidence are rarely reported and indeed they may not realise the advantage that has been gained.
Despite the emphasis on switching banks in the government's longer term objectives, the business may be best served by focusing on the existing relationship, at least until maintaining two accounts becomes a viable option.
A good relationship with a lending banker is an essential part of business life. However, it is widely acknowledged that no sooner has a strong relationship with a banker been established than he or she is off to pastures new, if not ousted in the latest merger.
What is really needed is a strong relationship with the institution - a concept that seems more akin to cuddling up with a computer than encouraging human interaction. In reality it means making sure that everything about the company's file at the bank puts it in the category of businesses that should be retained if at all possible. This does not mean that there will not be times when a negative decision is made, when on another occasion in exactly the same set of circumstances it would have been positive. The objective is to give the best possible chance of obtaining the optimum result.
Look at the task from the point of view of the banker picking up the file in head office. Traditionally, it is the job of the relationship manager to 'present the case', because his personal judgement fills at least one of the tick boxes. However, he cannot do it all and there may be a key moment when he is not there. Here are some of the perhaps less obvious points that can help the process:
There will always be times when life does not run smoothly and not all the boxes can be ticked. There are four business principles that apply whether the bank is involved or not:
Bankers make money by providing a full range of finance-related services. It is easier for them to grow their business by working with a growing business than by finding new ones.
Make the banker's job as easy as possible. Then ask for - and expect - a structure that matches the assets and cash flows of the business, the best prices, the best terms and the best service. If in doubt seek independent advice.
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