Top Ten Tips for SME’s dealing with Banks

Article by Patrick Sutton, Partner, O’KellySutton in The Sunday Business Post, 26th August 2012.

1. Bank Application Forms:
Get familiar with what banks are looking for at an early stage. Bank requirements vary, depending on the size and nature of the loan. All the banks have application forms on their websites and these will need to be completed.

2. Business Plan:
This is a critical document and, yes, banks do take time to study the plan in detail. It will quickly become apparent to a reader of a business plan if it is completed professionally as a key management tool or just for the sake of drawing down a loan from the bank. The plan will need to be clear, concise and address all the issues that the financier of the business will want to get clarity on. The banks themselves have business plan templates on their websites, or your professional adviser will have their own working templates and they can guide you through the business plan process. You should also have an action plan – we strongly recommend that there is one put in place and implementation programme attached to every business plan with objections/ goals, targets time lines, responsibilities, etc.

3. Financial Projections/Cashflows:
These should be realistic and supported by clearly set-out assumptions. They will need to stand up to closely scrutiny and questioning. One should carry out ‘what if’ analysis on the numbers. For example what if turnover, gross margin or overheads are down or up by 5, 10, or 20 per cent against budget etc. Apart from the ‘what if’ results, it demonstrates the promoter is thinking about what can go wrong.

4. Housekeeping:
Have your affairs in order, annual accounts are up to date, management accounts and tax clearance certs. Be in a position where you are comfortable with the lender visiting your premises for a look around.

5. Promoter’s Financial History:
Lending institutions need comfort in this area. They will carry out their own checks, but you must make your own case as well. It doesn’t necessarily mean the individual has to have years of success behind him/her as a business owner, but the promoter track record – whatever it is – has to stand up to scrutiny i.e., success in a previous venture, or as an employee, or a track record of successfully repaying private or business bank borrowings in the past etc. Promoters that are already highly leveraged will find it difficult because this presents a much higher risk scenario for the bank.

6. Promoter’s Industry Knowledge:
You must demonstrate an in-depth understanding of the overall industry, markets, competitors, customers etc. The supporting research and planning must be carried out at an early stage. You can’t expect a third party to lend money to a venture if you can’t demonstrate a real in depth knowledge and understanding of the industry.

7. Capacity to Repay:
The business plan and accompanying financial plan must clearly show a capacity to repay the borrowings. Promoters more than ever have to do their home work well in advance in this area. Right at the top of the financial institution, the due diligence checklist is, ‘how and when will we get repaid?’ There must be no uncertainty here.

8. Bank Presentations:
We have seen great business plans presented very poorly. It is incumbent on the promoters to be able to clearly communicate the business model and ‘sell’ the proposition to the lending institution. One cannot over state the importance of this.

It sometimes amazes me the lack of passion shown by the promoters when presenting their case. You must understand that your contact in the bank will have to prepare an internal paper to present/sell the project.

9. Security:
The type and level of security required will invariably depend on the size and type of funding being sought. Personal guarantees on their own may be acceptable in the smaller facilities cases. Other security may be sought for larger facilities. There is a large perception out there that loans have to be secured by hard assets. We have found the ability to repay much more important.

10. Terms and Conditions:
Don’t be afraid to negotiate with the bank. Just because it has agreed to support the project doesn’t mean you have to agree to everything it proposes. You should take advice on what is negotiable and what is not. And remember, study the small print on the term agreement; you should know what you are signing up to and what are the consequences are for non-performance.
Patrick Sutton, O’Kelly Sutton, Accountant & Consultants, Kildare, Co.Kildare.

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