How to get more from your relationship with the bank
Dealing with the bank presents a serious headache for many in business, including those in agriculture.
Lending to finance business operations and growth is often an integral part of operating an agribusiness, and for many in the industry, some type of lending is a permanent requirement in day-to-day business.
Because of this, many wish there was a formula, or set of rules, that could make the whole relationship and engagement with the bank a lot easier. And one of the most common questions in dealing with the bank revolves around “how can I get more from my bank?”
Get on the same page – it should be a partnership
In some cases it can feel like you are at the bank’s mercy and are constantly working to meet their demands; as opposed to the bank working for you. Your banking relationship should be a partnership, where you each seek to meet the needs and do what’s best for the other.
But, like any partnership, to get the most value it has to be a two way street. To ensure a great partnership, it is vital to start by getting an understanding of the other party’s point of view, and get clear on why they do what they do.
What are banks looking for … in layman’s terms?
In the same way you would be less inclined to do business with someone who is late paying their bills, a bank will be hesitant to lend to a business with a higher “risk profile” i.e. how likely it is that the business won’t be able to pay their loans.
As an agribusiness client you’ll have a “customer margin” that’s been set by your bank. This customer margin is based upon three elements (in the banking world known as the 3 C’s), that are assessed to form the basis of your risk profile, which are discussed below.
Understanding the 3 C’s is a key starting point in thinking about your own business’ risk profile, and provides a way of viewing your business through the bank’s eyes.
- Cashflow, in essence, indicates how the loans and any other commitments and expenses you have will be repaid.
- A bank will want to know: where is your cashflow coming from, how reliable is it, and is it enough to service everything?
- For an existing business, the best assessment of this is based on your historical financials.
- For startups with no history, or businesses that are making significant changes to their operation that may require increases in capital expenditure for the next 12 months, a cashflow projection is better suited. Frequently, cost efficiencies are gained by upgrading equipment or technology or realigning a paddock. This can mean an initial outlay upfront, but the savings due to improved efficiencies and lower running costs may not be seen until the 2nd. In this circumstance you might do cashflows for the next two years.
- How much surplus is there after all loans and expenses have been met? That is, are you in the “black” or the “red” after everything and everyone has been paid?
- If you’re in the “black”, by how much? This is what is referred to as the “fat”, which is your buffer. The more fat you have, the more surplus cash you should have available to fund any unforeseen events. (Unforeseen events? What unforeseen events I hear you say? Mother nature is a very obedient creature and rains exactly when I want her to!!!!!!)
- If you’re in the “red”, then why? What are the underlying causes? Are these one- off events or is there an ongoing issue that needs to be addressed?
- Collateral relates to your security or equity. Do you have more assets than liabilities? And by how much?
- In other words, what does the bank have to rely on if your cashflow fails and they need to lend you some more money or recoup their funds?
- There are 2 parts to this:
- The first is around your general equity. This would be calculated on your Statement of Position or SP. You would list all your assets (what you own) at the current market values (you believe to be true) and all your current liabilities (what you owe). The resulting ratio of assets:liabilities should be higher than 50% (i.e. 2 assets:1 liability).
- The second you have equity in your security. That is, anything the bank has a mortgage over; the most common type being land. This is calculated based on the Bank Value (B/V) of the land less the Total (Secured) Loan value for the land.
- It should be noted that in determining Bank Value (B/V) in relation to Market Value (M/V) of the land, banks “shade” land used as security depending on the use of that land, which determines, in general, how easy it would be to sell it. For example, residential land differs to rural or commercial land, as the markets of prospective buyers are viewed differently.
- And using the same principle as Cashflow, the more “fat” you have, the lower you are as a “risk”, because if times get tough, (i.e. crops fail etc), the bank knows they have ability to lend you more to get you through.
- The last C is around you as a person. It’s what could be affectionately called the “Great Bloke” or “Top Bird” test. Can you be trusted and relied on, and do you know what you’re doing?
- Are you honest and reliable, and considered to be a trustworthy person?
- Do you have a history of doing what you say you’re going to do?
- What’s your credit history and score? (You can also access this information)
- Do you pay your bills on time or do you owe money all over town?
- Is your overdraft always over its limit? (This is a whole other topic for another day)
- Do you have a lending history with the bank or are you a new client? (Again another topic for another day)
- Do you have a relationship with your bank manager? Does she/he have a “face to the name”?
- If plans or budgets fail, do you take responsibility for the choices you made that might have attributed to it?
- Do you even have a plan or a budget?
- Do you know what your incomings and outgoings are?
- How long have you been doing what you’re doing?
- What’s your reputation within your industry?
How might the bank view your business – and are you in a position to ask for more?
The 3x C’s above provides an overview of the basics on how your bank may assess your business and determine its risk profile. It also provides a glimpse at the bank’s point of view, and what their expectations of you in the partnership are.
Take some time to look back over the 3x C’s again, apply them to you and your business, and see how you score.
If you’ve got “fat” in the first 2 C’s, and can pass the “Character” test, then you may be in a position to ask the question around increasing your lending capacity and/or decreasing your customer margin and ultimately your interest rate. At worst, they can say “no”, which gives you the opening to ask, “What do I need to do to get this reduced?”
The most important part of this conversation is the proactive demonstration that you are looking to manage your risk profile, and work with them to improve your overall business position. Communication is key in these situations, and is often the factor that contributes to a less effective, or potentially deteriorating, relationship between you and your bank.
Looking to find out more?
If you would to learn how you could change your relationship with the bank, so that both you and them get more from the partnership, this topic forms part of the conversation in the upcoming Beef Business Management Program or Agri-Business Management Program – commencing on the 2-4 August in Brisbane.
Find out more and download your copy of the program brochure here:
ABDI are also hosting a webinar on the topic of “How to get the most our of your relationship with the bank” on the 26 July 2017. We are joined by Tanya Atkinson, ex agribusiness banker turned agribusiness advisor, who can provide her experience and expertise on both sides of the equation.