CASH FLOW ADVICE: Craig Alexander Rattray offers advice to show your bank that you are a good risk
Remember that banks only make money by lending to businesses, so they are always willing to do it, but only to businesses that present a good risk.
To secure bank loans, it’s important to show that you and your business are a good risk.
How do you improve your chances of getting bank financing and being seen as a good risk?
If you can tell the bank:
- There where you are
- Where you have been
- Where are you going
And you can convince them that you have an effective strategy and a good management team to deliver the operational plan, then they’ll lend you all day.
– Show the bank that you understand your finances and, more importantly, your cash flow.
– Show the bank that you are preparing good financial information on a timely and regular basis (historical, current and forecast).
– Keep the bank close to you. Share regular information, ideally share your management software package and your forecasts updated monthly, as well as a regular discussion maybe quarterly.
Tell them the good news and share the bad news – but explain the bad news and what you did to turn it from bad news to good news (or at least acceptable news that doesn’t unduly worry the bank – do -to know them are aware of it and face it rather than hiding from it).
What types of financing do banks offer?
Banks can offer a variety of types of financing, some of which are briefly explained below:
Commercial mortgages: used to purchase property-related assets such as production facilities, service depots and offices; generally repaid over more than 20 years.
Business loans: similar to mortgages, but unsecured by real estate and generally based on business assets and future cash flows; generally reimbursed between 3 and 7 years.
Asset financing: used to purchase assets used in the business, such as plant and machinery, production equipment, IT equipment, trucks and vans, tools and equipment, office equipment and cars ; generally repaid over 3 to 5 years depending on the life of the asset.
Invoice financing / factoring: these facilities immediately convert your accounts receivable passbook to cash, usually on the basis of a percentage of the invoice value up to 90%; ideal for financing profitable sales growth.
Overdraft: An agreed-upon excess cash position on which the business can operate, secured against the general assets of the business and occasionally by a guarantee from owners and directors.
Loans and asset finance facilities are repaid over a number of years and also incur interest charges and agreement fees, all of which are agreed upon upfront and before the documents are signed.
Invoice / factoring finance facilities are typically set up for a period (eg 12 months and renewed annually) and incur monthly interest and administration charges. Some providers also offer the option of insuring customers’ debts if they don’t pay, which incurs additional fees.
The banks get their money back and make a small margin on this loan. It is important to match the right funding to the situation that requires the funding. As noted above, there are specific types of financing and structures for different situations, and most banks will adhere to them closely.
As a business owner, it’s important that you understand these structures and your obligations around security, reimbursement, and what happens if things go wrong. Unless you have a professional and experienced advisor on your team or a part-time / split-time CFO or CFO, we encourage you to take expert advice before taking such decisions. You may also want to talk to other business owners and learn from their experiences.
We are supporters of debt financing for the right situations because it can be more suitable and cheaper, but as mentioned above it comes with risks if you don’t pay back on time.
Advice on cash flow appears here every Thursday
Extract of Mastering Cash Flow for Business Owners by Craig Alexander Rattray and Jeff Borschowa, available on Amazon, priced at £ 6.95
Craig writes a column for Daily Business every other Monday