Banking Relationships
With economic activity picking up, many small to medium sized businesses are re-assessing their banking relationships. The banking relationship for many of these businesses has been tumultuous during the last few years where the financial performance of the business has deteriorated, breaching banking covenants and thereby causing the bank to take a closer look at the activities of the business and how it is being run.
This is not to say that banks have not been supportive but more that the relationship between the bank and the company has been tested.
Depending on how ‘at risk’ the business is, the relationship may be managed on a more formal basis by the bank’s at risk division. This is a different relationship to the normal banking relationship, which would ordinarily exist during better times.
With an improvement in the economic landscape and improved financial performance, it may be worthwhile to review your banking relationship as a whole and determine whether or not your business is getting what it wants out of that relationship, or if there is a better alternative. A number of banks have come up with different products in recent times that may provide greater flexibility. A new relationship may also allow a different perspective to be brought to the table.
Like any service provider, banks need to provide good client service. If as a business owner, and a recipient of that service, you are not happy with how you are being treated it may be worth testing the offerings of the other banks in conjunction with an honest discussion with your current bank to identify what is the best option for your business going forward. It is often at these times that the most change in banking relationships occurs. This can be dictated by different degrees of risk and exposure that certain banks want in particular industries. For example, in a farming context, one bank may wish to increase their exposure to the farming industry, whereas another may want to decrease it.
It would also be wise to negotiate hard in relation to covenants and guarantees. Ensuring covenants are not unduly restrictive, nor securities over personal assets oppressive, will ensure a better working relationship. While both these factors protect the bank, they often constrain the ability for businesses to grow. If you intend to enter into a dialogue with a new bank you should be well prepared, this demonstrates that you are in control of your business and know your funding requirements. To assist the bank in gaining an understanding of your business you should be equipped with a recent business plan, annual financial statements, key performance indicators (such as gross profit margin, inventory turnover, creditor and debtor aging), budget and cashflow forecasts and a year to date profit & loss statement and balance sheet.
Entering into dialogue with another bank to test the market should be undertaken on a fair basis and probably should not be undertaken unless the business is ultimately prepared to move banks. If trust has been lost in the existing banking relationship, often this is difficult to repair and a change may often be best for both parties.
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