It is crucial for SME businesses to revisit their strategies for managing their relationship with their bank or banks.
Most SMEs present a good picture to their bank when they need to increase or extend their facilities due to business expansion, or when a loan matures. However, once the facilities are in place, it is quite common for SME clients to be unprepared and reactive rather than proactive when the bank wants questions answered.
Let me be blunt – if the only evidence of your relationship with your bank is an annual review, it’s not a healthy or productive relationship. Managing your bank as a stakeholder in your business requires you to maintain regular contact, similar to what you develop with your key customers or suppliers.
This involves scheduled meetings to keep the bank updated on your business performance and industry trends that are relevant to your business. Regular meetings also provide an opportunity to openly discuss any risks and opportunities in the business, including external factors. This style of discussion demonstrates to the bank that you have “line-of-sight” on the key business issues and are managing the risk factors.
Big brother is watching
It is important to recognise that your bank most likely already remotely monitors your business performance and sector performance well before you address any problems or challenges with them. When you submit your financials or management accounts, the banks have tools that perform analysis on the underlying results. Banks are incredibly well informed and have a good insight into how a business is performing and if it is on an upward or downward trend, as well as how it is faring relative to other customers in similar sectors or segments.
Remaining proactive with your bank highlights to them that you are managing your business. Most banks and relationship managers are not just fair weather friends. They are in banking relationships for long-term benefits, including incremental income through add-on products and services. It is important for SME borrowers to understand that it is costly for banks to lose them as customers through churn and poor relationships. Banks are equally motivated to retain good customers.
Banks and their credit departments dislike surprises, and the more you treat your bank as a stakeholder the greater the support you will have from them.In our experience we have found that relationship managers prefer an open and candid engagement with their clients, rather than no engagement at all.
In having open dialogue, when issues arise both the bank and client can work towards a consensus resolution, as opposed to the bank having to take an adversarial position to protect their interest.
A banker recently mentioned to me that the fastest way for a client file to go to the credit workout area of a bank when there are business challenges is for the client to stop returning calls, emails or meeting requests. If your banking relationship is under stress due to poor business performance or an external shock event, managing and motivating your bank as a key stakeholder becomes incredibly important during the business turnaround phase.
Our experience with SME clients during the business turnaround phase has been to ensure that the key issues for the bank and their strategic imperatives are understood by the business. Once these are known, the SME has an ability to establish a position to negotiate. We then recommend that the SME works towards achieving a consensus resolution with the bank and only commit to what is achievable.
On too many occasions we find that what has led to some of the management issues and frustration from the bank is when SMEs in distress over-commit on deliverables, or are inactive or refuse to engage with the bank. Only commit to what is achievable and be realistic in setting milestones.
Treating your bank as a stakeholder in your business, and not the enemy, is likely to result in a sustainable, mutually beneficial relationship for both parties.
Tips for SMEs on how to manage your bank as a stakeholder:
- Schedule regular, quarterly meetings to provide an update on your business.
- Provide good management information flow, including management accounts on a quarterly basis, and deliver them in a timely manner.
- Deliver annual tax returns and accounts in a timely manner.
- Provide timely 12-month forecast for future revenue and EBITDA, including associated ratios/KPIs relevant for your business.
- Understand your security structure with the bank (i.e. fixed and floating charge and covenants). During periods of strong business performance your bank may be open to relax these; and in the challenging times your bank may want to strengthen their position. It is important to understand where you sit.
- Monitor bank covenants on a monthly and quarterly basis. If you breach covenants you are in a position to engage with your bank early and agree on remedial action rather than receive a default notice after the event.
- Highlight that you have trusted advisors and involve them if necessary in meeting with the bank, early on.
- Ensure that your leadership team (including, for example, your CFO or financial controller) is known to your bank, as this demonstrates that you have management depth.
- Recognise that your relationship with the bank will be longer than your relationship with an individual banker. It is normal for relationship managers to move around to different roles as part of their development.
- Diversify your banking relationships (e.g. one bank for trading accounts and overdraft; another for leasing/hire purchase or trade). Having competitive tension in annual reviews is important for both parties. It shows you are regularly benchmarking pricing and terms, and not solely dependent on one bank. It also shows you have diverse funding sources.
–Dom Del Borrello is a Client Director for Vantage Performance.