As businesses continue to grapple with difficult conditions, some are expressing concern about their relationships with banks. Companies that have enjoyed long histories with their banking partners have expressed shock at the break with previously cordial relationships.
Figures from the British Banking Association (BBA) on the drop in bank lending to companies make for stark reading.
According to statistics compiled from the BBA’s membership, lending to non-financial companies decreased by £3.9bn in January this year, and in the six months to December 2009, it dropped by an average of £1.7bn each month. Over the year, according to the association’s latest figures, lending to non-financial companies stood at £340bn, a fall of five percent.
Much government policy on business lending has concentrated on the SME market, where warning signals about requests for new facilities falling on stony ground and existing facilities being withdrawn or charged at much higher rates than previously are thick on the ground. Denis Kaye, founding director of business consultancy Firm Ideas, says in this sector, relationships between banks and their customers have failed. Although bank relationship managers are keen to maintain dialogue, very often they have gone into what he calls ‘prevarication mode’, delaying decisions on new facilities while they report up and down the chain of command. That has been one of the biggest killers.
“Doubt on the part of the bank becomes self-fulfilling,” he says, “because [companies] don’t then have the support.”
It hasn’t just remained a small company problem. Among bigger companies, cautionary tales are similar. Arif Kamal, group finance director at GL Hearn, says much has changed in the commercial lending market for bigger companies, with banks scrutinising new requests and applying their terms of business more stringently than before. “It is difficult to obtain new funding or even negotiate on existing facilities,” he says.
Even overdrafts are not to be taken for granted. Banks can and do charge for facilities that are not being used – and charge at a higher rate than they might have previously.
The change in the supply and demand equation since 2007 has hit both sides of the customer-bank relationship hard, says Martyn Wates, chief financial officer at The Co-operative Group. The combination of Basel regulations on banks’ capital adequacy ratios and recent Financial Services Authority scrutiny has pushed the price of borrowing even higher.
In the short term
At the same time, there has been a trend towards shorter-term facilities, Wates says, putting even more pressure on FDs’ resources. While between five to seven years used to be the norm for bank loans, three-year deals are now common. That’s something that can lead to problems when proving that financing is sound and ongoing.
“When auditors give their going-concern opinion, they look for facilities for 12 months,” says the CFO. “Allow two to three months to renew a loan and you’re not far off being on a constant treadmill when it comes to securing funding.”
Loan-to-value ratios have also changed. They now generally stand at a maximum of 65 to 70 percent. With scant mezzanine finance available, the amount of equity that borrowers are required to put in has increased enormously from two years ago, when senior debt loan-to-value was at 80 to 85 percent and mezzanine finance could take this up to 100 percent, says Kamal.
He has also seen banks withdrawing facilities from businesses he considers very creditworthy, as they seek to exploit that capital more effectively elsewhere. Under pressure to repair their own businesses, they are making black and white choices that appear not to factor in long-term relationships. “They are looking after their own balance sheets,” he says.
All this only serves to make the relationship between bank and customer more important than ever. But the balance of power has shifted. In the past some FDs believed they did not really need a relationship, says Wates. These days, few can afford that kind of outlook. “Even if you have a good relationship, you certainly don’t take it for granted any more,” he says.
There are two key factors to maintaining a strong working relationship; first, the provision of information on the business – good and bad – and second, a win-win proposal. Wates tries to ensure his banks understand the organisation well by getting them to spend time in different operations and by sharing with them access to full financial information. He works with a small group of banks and makes sure they understand that, if they provide competitive terms, they will stand a good chance at winning other business.
Banks know they will have to tender. But they also know that they have a genuine chance of winning business.
The requirements are the same as they have always been – support and honesty. “We can all tender support in good times. When a business hits bad times, that’s the acid test,” says Wates. “And we’ve seen banks walk away from struggling businesses because of not enough cash, but we’ve also seen it [the crisis] used as an excuse to get out.”
Honesty is also critical. “Don’t promise something you can’t deliver,” he adds.
Relationships that have stood the test of time are the surest bet, says Kamal. “You need a bank that understands your business, that understands your management and has historical ties with your organisation,” he adds. “That way, when you need them they are more likely to give your needs due consideration rather than pull the rug out from under your feet.”
A good cultural match is essential. Dialogue with the banks’ relationship managers is critical – though banks often move relationship managers on every three years or so. However, the bank should ensure that this doesn’t affect your relationship and understanding of the long-term goals of the business should remain intact.
Kamal says that GL Hearn has considered changing banks. But ditching a 30-year relationship is not a task that should be undertaken lightly.
During the recession of the early 1990s, when Kamal worked with Wilson Mason, an international firm of chartered architects, his organisation changed banks. It was, he concedes, a nightmare. In spite of efforts to establish common ground ahead of the move, convincing the new bank that the company’s way of doing things was sound proved difficult.
Any FD should be very careful about either changing banks or bringing new requests to the table. You need to conduct a full feasibility study, you need to be fully open and honest about your business and its needs. “Banks don’t like surprises and are more likely to be helpful if you warn them about any likely difficulties,” says Kamal. The golden rule is full disclosure.
It is clear that banking relationships are two-way partnerships, with both parties having set roles they must fulfil.
Read our interview with Martyn Wates at www.financialdirector.co.uk/2226590
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