How to Borrow from a Bank – Presenting Your Case


The banks place great store by the banker/customer relation­ship, and rightly so. However, on occasions, a lack of under­standing of each other’s problems can arise. This is probably caused partially by a language barrier (ie the use of trade termin­ology by both bankers and customers), and also as a result of both parties having insufficient knowledge of how each other’s business really operates. This situation is unsatisfactory from both the banker’s and the small businessman’s point of view, as it could result in a bank declining to provide finance for what may be a perfectly reasonable business venture. What can then be done to improve this situation?

The banks are in business primarily to lend money (subject to certain Bank of England constraints) and thus have, in a sense, a commodity ‘for sale’. But have we, as bankers, given sufficient guidance to our customers as to how to ‘buy’ this commodity? This is a question that only our small business cus­tomers can objectively answer, but it is probably fair to say that communication in this area can be improved.

Cash

As a contribution towards this communication barrier, we attempt within this article to suggest ways in which a small-busi­nessman should present his case to his bank manager, with a view to obtaining finance for his business.

A banker, when presented with an application by a customer for finance, asks a few very simple questions:

1. What is the nature of the business?

2. What relationship will the bank’s money and other borrowed monies bear to the proprietor’s own stake (share capital and reserves) in this business, and how will the bank’s money be used?

3. How competent are the people managing the business? What are the plans for repayment and what will be the bank’s position if the plans do not come to fruition?

In order that these questions may be answered, the small busi­nessman should be prepared to provide his bank manager with the appropriate information. This falls into three categories, each of which is considered below.

Historical information

Although the future trading potential of the business is the vital factor in determining whether a bank will make a loan, the bank manager will wish to review the past trading record. The infor­mation required will include:

1. Details of the history of the company which will cover the areas of activity and trading record.

2. Audited balance sheets and accounts for the past three to five years, which should include the full profit and loss account statement.

3. Details of the borrowing record of the business.

Generally, much of this information will already be available to the bank manager. However, if this were not the case, arrange­ments should be made to provide it.

The present situation

Within this category, the small businessman should be prepared to provide the bank manager with the following infor­mation:

1. The audited or alternatively the unaudited accounts for the most recently completed financial year.

2. Details of the company’s present ownership and manage­ment.

3. Details of the resources of the company in terms of premises, plant and machinery and the labor force.

4. The current nature of the products of the company and de­tails of the marketing strategy which is being applied.

5. Up-to-date management information which will reveal the current levels of profitability, details of the investment in debtors and stock, and liability to creditors.

Future plans

The bank manager will have a picture of the business in terms of its past performance and current trading position. To complete this picture, attention must be turned to the most important factor in the equation: the future plans of the business and thus the reasons for bank finance. In order that the plans can be fully assessed, it is usual for these to be quantified in the form of budgets for capital expenditure, sales, profit and cash. The bank manager will, therefore, be assisted in the assessment of the proposition if the following are provided:

1. Budgets for capital expenditure, sales, cost of sales, over­heads and profit for say the next 12 months.

2. A cash flow forecast which, in effect, interprets the trading and capital expenditure budgets in cash terms and thus helps to identify the projected borrowing requirements.

Conclusion

The presentation of your case in the manner suggested will not necessarily guarantee the bank manager’s agreement to the level of lending which is reflected in the cash flow forecast. However, it will ensure that the bank manager has a greater understand­ing of the business and its needs, and thus will be in a better position to offer constructive advice and assistance, with a view to enabling the fulfilment of the plans of the small business­man.

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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

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