Banking Pearls

This Blog has moved!

noreply@blogger.com (Nathan) — Tue, 26 Oct 2010 00:25:00 +0000

As most Blogs do, we have matured, warranted our own URL and moved to www.bankingpearls.com. Follow us there!

Government's chance to increase bank competition

noreply@blogger.com (Nathan) — Tue, 05 Oct 2010 11:11:00 +0000

Bankers in major banks (ne all banks) are pushed very hard and are forced to give their employer more than a pound of flesh. However the last couple of years have frustrated banking's frontline. Believe it or not, most bankers get into banking because there is an element of doing community good in what we do. When you help a business by financing their investments and facilitating growth and success, you feel great. You have made a difference.

However in the last couple of years, the brief from above has been conflicting. Meet your profit targets, but don't lend money to new clients (unless they are amazing businesses with zero chance of default or loss). Relationship management have been the ones delivering the "no" regularly to finance requests from existing and new clients (even when they believe strongly in the applications) and then, often at the same time, delivering price increases which are the only alternative to cover declining loan portfolios which are not getting topped up by new lending so are naturally losing revenue/profitability. The bankers have been lucky that the environment has allowed then to creep margins up, as without this bonuses would have been scarce.

This is not why bankers got into banking for the most part, and there are a large number of frustrated employees out there itching to get back to helping businesses move forward.

Now credit teams are still ferociously powerful and difficult to convince to approve new business. The times are uncertain and many corporates are still challenged by the environment. The bankers are looking at their new budgets for the 2011 financial year just started and wondering how the hell they are going to get there.

The RBA is on to this. They've come out this week and poo pooed the banks thinking about putting up rates, clearly sensing that bank's leaning towards taking the easy way out of their dilemma. But the banks are in a corner and are naturally pushing back.

The recent Senate inquiry into Small Business lending gave the Government little in the way of options to drive increases in financing to this sector. Quite rightly you can't force banks to lend, especially to a sector that is a higher risk segment of the finance market. However perhaps the Government can increase the appetite of banks here by increasing pressure to not lift rates beyond the RBA.

Perhaps we will then get a situation where the banks have to start writing new loans to make their budgets.

Small business owners lose the Aussie dream

noreply@blogger.com (Nathan) — Fri, 01 Oct 2010 00:06:00 +0000

Small business lending stinks and home loans are cool. That's the message that we are getting in the press and in practice when we go and ask for a small business loan.

You have to feel for the small business bankers actually (well you don't but having done the job once I do). They have a master that is telling them that they don't like property security and to focus on cash flow lending, however they have a credit department who can't get comfortable in today's environment with business performance so they only want to lend if there is limited or no probability of loss given default - ie residential property.

On top of this, if they just do the deal as a home loan, invariably the client moves from being a business bank client to a retail bank client and so not only does the bankers lose the client, but the client loses vaguely decent business banking support.

But look at the maths here - business lending rates are between 7.5% and 10%. You can get a home loan for less than 7%. Not only this, a home loan will often be automatically approved, on the spot, where as a business loan will take a minimum of 2 months just to get some sort of wishy washy maybe answer with a list of further info requirements that are longer than your arm, the last one being "can we have a mortgage over your home please".

Business managers are hence being forced to choose- give the bank your home, chock it up with debt, and you can have a loan now, or leave the home out and wait until you don't need the money any more to get a conditional approval on you giving you home...... And there goes the Aussie dream of owning your own home......

Shift happens....

noreply@blogger.com (Nathan) — Thu, 30 Sep 2010 11:33:00 +0000

Not sure who put this together and its got nothing to do with banks but it sure gets you thinking....

10 signs of a bad bank relationship

noreply@blogger.com (Nathan) — Thu, 23 Sep 2010 00:30:00 +0000

1. You have been with your bank for 100 years but annual rate reviews only ever seem to go up, not down, and they hold so much security that if you went under they’d even take possession of your Mother-in-law….

2. Your bank manager is the fifth this year and you suspect that as they actually get younger every time, by the end of the year its possible your manager then won’t be eligible for a drivers license yet….

3. Your bank has taken 6 months to approve a temporary overdraft increase that you needed 2 months ago but with the condition attached that you pledge the total earnings of your first born child….

4. You ask your bank to release your personal guarantee and they disappear under the desk and return with a fake moustache and glasses and insist that they only speak French….

5. You are continually having to justify your existence, reporting monthly on number of toilet visits and requesting permission to spend $2 on buying your top client a 50c ice cream at McDonalds…

6. You tell the bank that you need more working capital and you come away with a lower loan limit, not more….

7. You have the opportunity to invest in a magnificent growth opportunity but when you check your bank account the bank has decided to use your savings to pay down your loan, and the they ain’t giving it back….

8. Your bank refuses to allow you to hedge your foreign currency exposure and then slaps you with a large stick when you lose money because the US$ went up and book FX losses….

9. You need to employ a finance manager simply to be able to meet the bank reporting requirements…

10. The only time you see you bank manager is at the football, when they are there clearly hosting a table of other customers ….

If any of these resonate with you, why not have a look at our Bank Management Services - we might be able to help

5 things businesses must do to improve bank relationships

noreply@blogger.com (Nathan) — Tue, 21 Sep 2010 04:10:00 +0000

Nick Gardner exposes an underbelly of bank disinterest in small business lending in his article published on Sunday.

Reading through it he shines quite an inflammatory torch on the banks with quotes from various folks citing catastrophic business consequence. Whilst not all businesses would be suffering quite as portrayed, there are probably thousands of businesses out there that are. From a shareholder's perspective, banks are not charities and they need to manage the very finite capital resources that they have to ensure maximum return. However this doesn't help businesses suffering under the bank disinterest shadow.

I have to also say that my bum twitches at the thought that new global banking parameters handed down in Basel will likely further turn banks away from small business as the relative differential between the capital required for business lending and mortgages increases again. However banks have got much better in recent times at justifying (at least to themselves) price increases to compensate for this which probably just means that those businesses that need to borrow, will be able to, however they need to expect to pay considerably more!

here are some things that businesses need to consider when managing their bank relationship going forward.....

1) Reduce your risk perception

Businesses need to become much smarter at managing the risk messages that they are conveying to the bank. Obviously, the lower risk you are, the lower your pricing will be and the more attractive you will be to banks.

This is about managing your trading accounts, paying your loans on time, operating within your covenants and budgeting conservatively (for the bank).

Pearl Finance have a Risk Grade Assessment service that can help you to understand what you are doing wrong.

2) Give comfort about the future, justified by the past

The number 1 reason why a bank will foreclose on a business is because they have lost confidence in the business' ability to trade its way out of trouble. If you want to have an unsupportive bank, then do yourself a favour and keep them in the dark about your plans for greatness.

If you don't have plans, then you need to ask yourself "would I invest in my own business" and then detail on paper why. But remember that banks are cynical bastards. If your enthusiasm is based on pipe dreams and ideal world scenarios then you are portraying yourself as a gambler, not a business person. Leave the low probability get rich moments to your horse racing pursuits! Your plans need to be 85% certain of coming off (ie sales contracts in place or evidence that you have done it multiple times before) otherwise you are kidding yourself.

Check out the forecasting checklist attached (you need to sign in but there is not cost and you won't be hassled by ongoing communications unless you elect to be)

3) Tell your bank what you need and why

Always spell out for your bank what you want from them. The average banker is taught to be an order taker, ie you ask for something and then I'll choose whether the answer is yes or no. If you don't put propositions to them in this black and white format, they will find it difficult to respond.

4) Identify the risks in your business for them

If you tell the bank what is wrong with your business, you reduce the need for them to think about this as hard themselves. Having aired your dirty laundry however, you then need to take the time to explain to the banker why they shouldn't be worried about the things identified. This does 2 things - it shows that you are a smart business person employing sensible risk management practices in your business (remember they are in the risk management business too so they will love this!) and bottom line - you are managing the risks inside your business, something most businesses never take the time to do!

5) Have a Bank trusted intermediary on your team

Don't underestimate the value that a bank, who is doubtful about you and your business, will place on you then appointing someone that they trust to advise your business. All of a sudden, the bank believes that they are getting the full picture and they can stop guessing what is really going on behind closed doors. The bank can also gain confidence that the business is working with the bank's interests in mind - they love this.

Who are the intermediaries? I'm not sure that your Accountant is enough. They might be bound by professional codes of conduct, but they aren't bankers and, though there are plenty of exceptions to this, they don't necessarily know what a bank wants and thinks.

Insolvency Accountants have very close relationships with the banks (banks are their best source of new business). However, again as a generalisation, insolvency Accountants have a vested interest in you falling over as they are then the most likely candidate to take you over. Also, they are not always good at trading businesses as they cost too much to spend the time needed. Their forte is selling businesses and business bits. Unless this is your most likely resolution then you might want to think twice.

Experienced bankers are your best bet in my heavily biased opinion! We bankers understand the concerns of the bank. We know the issues that will be concerning them and we know what the business needs to look like to alleviate concern. We are not widget experts however - ie we can help you plan what needs to be done to get you out of the pickle, but you will be left to drive this. This keeps the costs down.

Happy to chat this through with you if you are having some issues. Simply leave a comment below of alternatively contact me at Pearl Financial Services, leave some basic details and I'll give you a call.....

Banks currently open for business (Sept 2010)....

noreply@blogger.com (Nathan) — Mon, 20 Sep 2010 05:17:00 +0000

Well I have to say that I am noticing a slight change of attitude with the banks. As talked about in Michael Pascoe's article last month we are starting to see some signs of hunger in the banks re actually writing business loans, rather than just pretending to and telling everyone you are, like they have been!

In the last month I've had some good reaction from ANZ to a couple of my deals. Both the deals were good opportunities but both had some slight historical trickiness that would have been used as a good reason not to touch them a few months ago. Followers of this article series will know that I have always spruiked ANZ as they have been most receptive of Pearl clients throughout the GFC, and they continue to do well. Further to this I now have them agreeing to take my submissions at face value for the purposes of issuing indicative term sheets which is great as this will save some time.

NAB are the other bank that I am hanging out with a bit at present. They don't pay brokerage which is a pest as it means that clients that we put there need to administer our brokerage themselves which is a pest for everyone, but they are happy to do it as, to be moving banks, means that we have got them a deal that makes sense to more for. NAB are very keen to build capability internally to enable Business Bankers to have the skills to be able to provide financial performance feedback and guidance to business clients. Whilst this might not be ever client's desire it is a great initiative as it shows that NAB are trying to differentiate their service by having bankers that understand business better.

Both ANZ and NAB are not cheap, but at least they are doing business lending so better to have an expensive loan to take advantage of growth opportunities than not have aloan at all is what I'm telling people.

The rest of the lending that I'm doing at the moment for clients wanting new funding lines is going to non financial institutions, namely Bibby Financial Group, Banksia Financial Group and Octet, all of whom are working really hard to write new business, and all of whom have good products that clients generally like.

In the last month I have also been introduced to Liberty Financial for Debtor Finance and I have to say that the one interaction I had was very impressive. They are very hungry for new business and this shows itself in the speed with which they attend to new applications. To me I am less worried about what the lender charges and more interested in how fast they make a decision, be it positive or negative. Liberty were super fast and I plan to through a few new deals their way this month as a consequence.

The non financial institutions continue to impress in their speed of decisioning relative to the banks and where possible I am trying to avoid the banks for this reason!

Happy banking,

What would be harder - 2 banks or 2 husbands?

noreply@blogger.com (Nathan) — Fri, 17 Sep 2010 07:27:00 +0000

Having a bank relationship has remarkable similarities to being married. Like marriage, your bank relationship starts with some courting - business owners might have even played the field a little! But in the end a business and the bank will fall in love and decide to "settle down and start a family".

Like a marriage, your bank relationship needs plenty of ongoing maintenance work. It needs constant communication on what each is thinking and doing, the odd piece of jewelery, a nice dinner out, and perhaps the occasional trip to the footy. It also often relies on compromise to ensure harmonious continuance.

Now what would happen in your marriage at home if you were to introduce a second husband or wife into the mix?

Even if your wife allowed the new partnership to commence (mine wouldn't, though to be fair I haven't ever asked) then I would imagine that keeping the new 3 way partnership afloat would be extremely difficult, not to mention expensive to set up (2 weddings instead of one).

Each wife would be continually looking over your shoulder at the other wondering if they are missing out on something. Each would be wanting you to spend time with them, nurturing and caring for them. They'd each expect a degree of equality when it came to their share of assets and income and no doubt each would require their time in the bedroom with you.....sounds exhausting to me!

So why would you consider it in the first place?

There are a few drivers that make the concept look attractive and need consideration:

The key positive is the introduction of competition. Theoretically you would expect each of your wives to always be contesting to win your sole attention and to oust the other from the awkward trio. In banking parlance you'd translate this as cheaper fees and charges, but also better overall relationship experience. However I expect that overtime, as the wives became more complacent what you'd find the competition element subsiding, or even worse, the wives might start to conspire against you and collude and these advantages might start to dwindle.

This would be especially true if, tired from attending to everyone's needs constantly, you start to let slide on your maintenance work for both of them!

Another possible advantage in the multiple wife/bank strategy is that if a wife leaves you, at least you still have one partner to keep you company and to support your needs. The GFC has taught us that banks pulling out of markets, changing risk appetite and even as seen OS going bust, are real risks for businesses.

The negatives are fairly obvious:
1) You have to deal with 2 spouses - don't underestimate how annoying this will be when we're talking about having 2 banks!
2) No one wife has a view of the whole picture. This will cause difficulty if you need a special favour as you might find yourself in a position where neither wife has sufficient comfort to help, worrying that the extra effort might put them at a disadvantage next to the other wife. Just to clarify from a bank perspective I am thinking of instances where you need emergency funding increases and neither bank is willing to step beyond their own limits for fear of taking on a disproportionate share of the risk.
3) There is high chance that one wife will become jealous of what the other wife has, and start to become hard work. We have a client that is experiencing this now (with their multiple banks that is). One bank has more than enough security and the other is a bit skinny. The skinny one is being a pest now as credit don't want to carry disproportionate probability of loss given default if the business falls over (which it is not showing any signs of doing - the bank is just being paranoid!)

Now its worth mentioning that large corporates have multiple banks and perhaps medium sized corporates would love to look and smell like these big boys, but I think we need to think of them as exotic wealthy sultans with their Harems. If you can afford a team who will manage the wives for you on a full time basis, showering them in gifts and ensuring that there is plenty of wealth to go around, then perhaps there is an argument to say that the multi bank thing might just work. If you can't afford this level of support then you might just collapse of exhaustion trying.

I, for one, have enough difficulty keeping one wife happy, and I am sure that this would translate to my bank relationship too so I would think carefully before rushing in to introduce a second bank. It might just be more trouble than its worth!

CBA tipped to lift mortgage rates

noreply@blogger.com (Nathan) — Thu, 09 Sep 2010 00:57:00 +0000

Following on from my article Behind the spin, NAB business performance is as bad as the rest in August, the Age reports that JPMorgan banking analyst Scott Manning is seeing signs in the recent CBA annual report presentation of an inclination to lift rates rather than go the hard yards and simply combat the declining loan book by lending more.

Would I do the same in their shoes - probably.....no, most definitely, but its not necessarily doing the economy any good and my guess is that if government were watching this, they might feel compelled to step in.

CBA tipped to lift mortgage rates:

Are your commercial loans appropriate for your business?

noreply@blogger.com (Nathan) — Mon, 06 Sep 2010 05:32:00 +0000

Banks are mysterious beasts! They are always nice to you when times are good, are seldom easy to deal with when times are tough, and you never really know where you stand. It is this mystery that challenges business to ever really trust they bank.

When I see a new business, I am often provided the opportunity to hear the "real story". This is the story of what has been going on that the business hasn't told their bank. Good businesses don't tell the bank the whole story because they don't think the bank need know it as there is nothing to worry about it. Businesses with trading issues will never tell the bank the whole story because they are fearful of what the bank will do with the information.

The reality is though, that businesses that aren't sharing the whole story with the bank - their funding partner - aren't entitled to complain about banks not caring about their business as they aren't giving the bank a fair shot at providing a deep and meaningful relationship.

Pearl Finance offers a Bank Check service that helps businesses understand the sort of information that should be shared with the bank and why. The service is quick and inexpensive, and it will also identify if the rates they are paying and the amount of security they are providing for commercial loans is appropriate

Small Business Lending and Bank Management issues are set to ease in the coming months....

noreply@blogger.com (Nathan) — Wed, 25 Aug 2010 00:58:00 +0000

Small Business Lending and Bank Management issues are set to ease in the coming months....

Bank drought over for SMEs! - Pearl Financial Services

Michael Pascoe | Banks loosen the vault hinges | Business lending

noreply@blogger.com (Nathan) — Tue, 24 Aug 2010 23:51:00 +0000

Like minded thinking that banks will start to lend to business again....

Michael Pascoe | Banks loosen the vault hinges | Business lending

Business lending the key to future bank success

noreply@blogger.com (Nathan) — Mon, 23 Aug 2010 22:33:00 +0000

Westpac again raised the prospect of difficult times ahead regarding profit, as recounted in the following article by Glenn Dyer. However it needn't be that hard if banks started lending to quality businesses again.

Gail Kelly recounted that business lending demand is weak, however this is not my experience. Most businesses out there would change banks in a flash and many have grand plans for growth. The thing that stands in the way is bank appetite, not propensity to borrow.

THE DISTILLERY: Bank bruising | Glenn Dyer | Commentary | Business Spectator

Debt Collection made easy

noreply@blogger.com (Nathan) — Tue, 17 Aug 2010 23:27:00 +0000

I recently had a customer hold out on paying me as they were going through a tight spell with cash. This happens, especially in my game, and given my aim is to help clients out of these tight spots the last thing they need is me causing more problems. However this client stopped returning calls, stopped communicating and went under ground. Not on!

After 6 months of chasing, I finally had enough and wrote the client a letter. In the letter I undertook to do 2 things if they didn't make payment within 1 week of the letter date:
1) I would brief solicitors to commence legal proceedings
2) I would lodge a default with the credit bureau, Veda Advantage

After another week of silence I lodged the default. Well, within a couple of days this started working for me. The client was seeking some equipment finance for a new car, and moving offices and both of these processes ground to a hault, as the parties that my client were dealing with used the credit bureau to assess credit. Basically my client could not move until he resolved the difference with me. Brilliant!

To lodge a default you need to be a member of Veda Advantage firstly. Then there are a series of lose requirements re the need for a credit contract to be in place, with over a minimum amount being over due for a minimum period. But it was very easy to do.

Management of your debtors is a key process that banks look at when they are assessing your for credit. If you have a robust process, you will also have a healthy debtors ledger, which banks not only love, but in certain instances will also use as security. Next time you have a painful debtor, consider using Veda Advantage as a primary collection tool. It really worked well for me!

Behind the spin, NAB business performance is as bad as the rest

noreply@blogger.com (Nathan) — Tue, 10 Aug 2010 22:47:00 +0000

Reading through the AFR this morning I can't help but think that either the NAB spin machine is working hard or, NAB don't really get what is going on.

In Matthew Drummond's article NAB holds its nerve on rates it is implied that NAB is under pressure from Westpac and CBA who are stealing business clients by the truckload. George Liondis then goes on to recount Cameron Clyne in Rivals step up race to topple bank who also implies that they are under assault without naming the culprits.

My observation is that this is not the real story. The reality is that I would be genuinely surprised if Westpac had written a new to bank deal in nearly 2 years. CBA would be writing a fair bit but this would be mainly property related transactions. However NAB's biggest problem, and the main reason, I suspect, why business lending is down 1.6% is due to natural attrition of the book, and a credit department that is too timid to approve new deals fast enough to replace it. It is unlikely to be anything to do with an increased interest by competitors.

There is nothing wrong with demand for business credit - I am seeing plenty of businesses every week looking for more. What is wrong is that very few, if any, credit departments are willing to approve new deals. The process for dealing with a bank is slower than in any other time in history potentially. The first bank to wake up to this and to start moving at a decent pace will dramatically increase market share. They don't even need to drop prices. The rest of the market is that asleep that for most business customers just getting a bank that responds quickly to requests would be reason enough to incur the transfer costs and move banks.

Cameron Clyne goes on to observe that banks are doing crazy things with rates in business banking. NAB has always had an inflated opinion of their own worth and the value of their relationships, and other banks, especially CBA, have always been significantly cheaper. This is not new. In spite of this, NAB has grown to hold the largest market share. With a large market share comes a large attrition rate that needs replenishing as every day clients are paying down loans per scheduled principal reductions. If NAB does not write enough new business to replace this their book will reduce, and their income will reduce accordingly. Market share is probably remaining constant as none of the other banks are writing new business either so all are experiencing decline at the same rate.

If NAB Execs want to fix this, speed up your decisioning turnaround and slap your credit departments! It wouldn't be hard to do a lot better than the competition....

Australian Banking and Finance � NAB 2010 June quarter trading update

noreply@blogger.com (Nathan) — Tue, 10 Aug 2010 02:39:00 +0000

Reasonable result from NAB though it would be good to see their Net Interest Margin!

Australian Banking and Finance � NAB 2010 June quarter trading update

Banks currently open for business (Aug 2010)

noreply@blogger.com (Nathan) — Tue, 03 Aug 2010 12:16:00 +0000

July was an interesting month with the key observation being that Westpac customers were unusually unhappy. As a general observation I have not had many refinance inquiries from Westpac customers for the last couple of years, however in the last 2 weeks I have had 3.

From what I can glean, Westpac has been changing the rules internally and are opting to chase down 'poor performers' and to remove unused limits - if you are to believe Joseph Healy from NAB they are presumably reducing their capital exposure to business banking to better apply to mortgages! This has resulted in some quite good banking customers calling on our assistance to go back to the bank an try to help the Relationship managers try and talk sense into credit. Very strange behaviour by Westpac!

ANZ has come through with the goods for me in the last couple of days, though it has taken a while to get a proposal out of them. The proposal is not particularly sharply priced, but they have been quite astute with their product selection to not only better fit the client need, but minimise pricing (significantly) without compromising on their margins. The result is a massive saving for the client!

I am also getting some very quick turnaround from Bibby Financial Services, a specialist Debtor Finance provider. They are a pleasure to deal with as they are empowered and hungry to write quality deals. Their responsiveness is great. The pricing can shock clients initially, but often they are supporting businesses that others don't have the appetite for, though they are correct to do so.

I am also working closely with 2 other non bank financial institutions at present, being Octet and Coface. Both are proving challenging to gain credit approval but both have a good product and are worth pursuing.

Businesses forget to excite their bank....

noreply@blogger.com (Nathan) — Mon, 19 Jul 2010 23:58:00 +0000

The number one reason banks give up on a business and appoint receivers is that they have lost faith in the future viability of the business. If they believe the business is heading somewhere positive, they naturally assume that they will get paid back. Without this hope the natural conclusion for the bank is to assume that the business will be unable to pay its debts and the bank is better off taking charge of their own destiny.

It is easy to overlook the fact that your bank is actually an investor in your business. They have made capital available to you to grow your business, just as your shareholders have. The only difference is that they want a lower risk for their investment and in return they have lower yield expectations than your shareholders. You need to assume that banks have an infinite number of choices for how they invest their capital to gain a return, and their choosing to invest in your business is firstly a privilege (there's no rule that says they have to), and secondly a compliment to you as they are willing to back your vision of the future and your ability to achieve it. However if they lose faith in this vision and your management ability, this is when they take action to get their money back.

So lets break this down a little further. For a bank to believe in the future there need to be some key ingredients:

1) The future needs to be exciting - a business planning to just get by in an ordinary market is not exciting. Your business needs to have a value proposition that more people want than the business can afford to service. The business needs to recognise and convey to the bank the ins and outs of the market place, and it needs to demonstrate that it has a plan to perform well in this market. Most of all, the business needs to be able to demonstrate in a forecast that it can not only pay its interest and reduce its debt in line with its commitment, but that there is plenty of money left over!

2) The future needs to be realistic - Entrepreneurs are great at thinking big, but bankers aren't. Bankers are well and truely tied to the ground (you would be too if you had to deal with credit all day!!). A bit of long term exciting BHAG work is great, but the next 12 months needs to be tied to realism. If you didn't do it last year, why do you think you'll do it this year! This is the question you need to be able to answer with some conviction. It is alright to say that you didn't think of it and that's why it hasn't been done, but then you need to be able to justify that it can be done. Actual sales contracts, market research, Heads of Agreement. These are things that are going to de-risk a future for the bank and give confidence that the future vision is achievable. Without this sort of justification your future risks looking more fiction than fact.

3) Show me the money - You need to continually furnish your bank with a "3-way" forecast. This means Balance Sheet, Profit and Loss, and Cash Flow Forecast. You need to show in this that your revenue expectations are realistic, your costs are similar (or better) to last year unless you can justify specifically what will change and your working capital management makes sense. This means that you will be managing your debtors, inventory and creditors to ensure that your cash levels improve. Finally your cash flow forecast and balance sheet need to show the bank very clearly what you need from them, and that you are going to meet your commitment to them. You will have sufficient funds to meet your interest expenses, you will stay within your account limits, and you will make your principal reductions. If you need capital investment for your growth plans (ie new machinery, vehicles, larger stock levels) then you also need to show how you plan to pay for this.

4) Get it right, first time! - The bank needs to be able to believe that Management is on top of their game and worth investing in. Each time you get your forecast wrong, you risk the banking losing heart in the ability of your management skills. Only put things in your plans that you know will happen, and think worst case. If you think worst case and you still come up with a great result, then the bank has nothing to worry about! However if your worst case opens up potential for the bank to have a problem, then you need to raise this with the bank now. Don't hide from it. Identify the risks and help the bank get comfortable that the risks are being managed.

It is very hard to convince a bank that you are a good bet, once they have lost faith in your ability to manage their money. Regular Forecasting and Business Planning will help the bank take comfort in this regard. If you're not good at forecasting, get your Accountant to help. Banks prefer Accountant prepared forecasts anyway. For some other tips on forecasting, check out the Pearl Financial Services website where we have put together a free checklist that businesses can use. There is no cost to join up and the information will help you focus on becoming a better bank customer.

Banks going to extreme lengths to retain customers

noreply@blogger.com (Nathan) — Thu, 15 Jul 2010 05:22:00 +0000

A lender that we deal with was recounting to us today that they have had 3 instances recently where a client has come to them after their existing bank has insisted that they leave. Our financier then assesses and approves a facility for them, generally a little more expensive that the client is paying the existing bank as their cost of funds is higher. The client has gone back to their bank to make arrangements to transfer their facilities and the existing bank has decided to make a counter offer, that is not only cheaper than our lender's offer, but also cheaper than the existing rates being paid!

In short, the bankers are realising that it is much harder to get new deals through credit so they are doing all they can to retain clients. What is perculiar is that these are clients that have been asked to leave!

In my article - Drive Bank Competition; Shop your Bank - I suggested that businesses would be well placed to threaten to leave their bank as banks will drop rates to keep you. Today's discussion just reinforces this.

Trade your business out of Asset Management

noreply@blogger.com (Nathan) — Fri, 09 Jul 2010 04:30:00 +0000

Asset Management, aka the Hospital Division, is the relationship management division of the bank where non performing customers are put. This can be because you have defaulted on your loan payment obligations, or it can be because you smell like you might default.

Banks sell the decision as being an opportunity for the business to gain a Business Banker with more time on their hands to spend helping the business through the immediate challenges, and sometimes this is true. They might even charge you for the "privilege" with an extra service fee.

However more often than not, this is a staging post for the bank to then devise a plan to recoup its money, either by pressuring the business to refinance, pressuring it to sell down assets, or, in worst case situations, appointing someone else to do this for them (ie a receiver/liquidator).

Asset Management bankers are a different breed. Generally speaking, they are very financially astute, and quite experienced. However their method of managing the relationship is different to other bankers:
- these guys don't want to get too close because they might one day need to cut your throat (metaphorically).
- They are much less focused on customer needs and much more focused on bank needs. They are not paid to retain your custom, they are paid to find the most appropriate way to secure the bank's funds. IT IS ALL ABOUT THE BANK!
- These bankers are much closer to the decision makers, ie the holders of credit discretions, so things can move much faster in this division.

Generally the business manager knows in their heart of hearts that transfer to this division is coming, but it naturally comes as a kick in the guts when it does. No-one likes to be told that they have done a bad job, and this is essentially what the bank is saying. Also the transfer of your business to Asset Management turns the temperature up to 11, as business owners are one step closer to losing control of their business. The bank now requires constant updating and the business can't sneeze without asking first for permission. The danger is that you spend all your time adhering to the bank, and as a consequence you have no time left to fix the problems that got you there in the first place.

If you're going to get out of this spiral then there are certain things that we recommend to our clients that you should consider:

1) Understand from the bank exactly what it is about the business that is concerning the bank. This becomes the focus of any future reporting strategies. Some obvious reasons for being put in Asset Management are:
a) Profitability is insufficient to meet debt servicing (interest and or scheduled principal reductions)after all other trading obligations are met (incl tax)
b) Cash is insufficient to meet debt servicing - cash is different to profit. you can be profitable and still not have enough cash because your debtors or inventory is too high.
c) The value of your security has fallen below the bank's comfort threshold, and your servicing capacity is a concern.
d) You or your industry have become unattractive to the bank.

However don't be distracted - these are symptoms, not causes of the transfer. A bank will continue to service a non profitable or inadequately secured customer from the normal relationship stream as long as the credit managers have confidence that management knows how to rectify the problems.

The fastest way out of Asset management is to regain credibility with credit managers that you have the knowhow and ability to trade out of the pickle that you collectively find yourselves in. This leads to the 2nd recommendations

2) Construct a plan early to fix the problem. This plan needs to recognise 1 thing above all else - The bank no longer cares about your future business prospects. It is only interested in how its going to get its money out of your business. The plan needs to tackle growth, sales, trading performance etc from this perspective.

The plan starts with numbers - ie a forecast P & L, Balance Sheet and Cash Flow Forecast - and each number needs to be justified as validate its accuracy.

Ideally the bank will entertain a plan that rectifies financial strength quickly using conservative and realistic assumptions leading to a line of sight to the bank getting its money out. The punchline of the plan needs to be "and then the bank gets paid out!". This payout can come from refinance, sale of assets or surplus cash from trading, but it must end with this line.

3) Agree a reporting format with the bank that is very quick to produce, and goes to the heart of the bank's concerns, and then report as regularly as you can. The best way to cause a bank to appoint an external administrator is to not tell them what is going on. The bank will assume that if they don't know what is happening, then you don't know what is happening.

Be careful here though - the report must be quick to produce. Too often a business decides to prepare a 20 page report for the bank to show them what is going on. the trouble is, this precedence is then set and the bank will expect this level of detail weekly/monthly and that is when you lose control of your business.

4) Be very open and hide nothing. Good news or bad, tell the bank. They will find out anyway, so better it comes from you.

5) Your Asset Management Banker is Human. He/She doesn't want to ruin your life. Not many people are this heartless. They do however have a job to do. If you make their life easy, and if you make them look good, then there is a lot that they can shield your from, and right now you need all the advocates you can get.

6) Don't take the bank's wants on face value. The bank will likely have had an insolvency Accountant prepare an investigative report on your business, and quite often these reports are very one dimensional - sell bits to pay down debt. If you believe that you can trade out of the difficulties without selling things then you should present this, but beware that your plans should not require extra bank funding, as you are unlikely to get it.

7) Consider getting a banker on your team. Having access to a banker gives you the ability to better plan your communication and to understand how the bank will react before they react. They also provide you with a good sounding board regarding the best way to keep the bank on side while you trade out of the situation. Pearl Financial Services provide this service, though any banker would do....

Banks currently open for business (July 2010)

noreply@blogger.com (Nathan) — Tue, 06 Jul 2010 04:28:00 +0000

In Australia you would be excused for thinking that all banks are the same. Oligolopolies promote this. However my experience is quite different.

I assist businesses everyday to get better banking outcomes. Often this involves the business learning about what is important to banks, and occasionally it is because the bank is being very unreasonable. But I am constantly bemused by how different banks act and think, and in this series "Lenders that are lending" I plan to share these experiences.

It is important to note that my experiences are not necessarily what you can expect across Australia, though my business has national reach and my views are influenced by our interactions nationally. It is also important to note that my experiences are ny experiences. Yours might be different and if so then I would like to hear them too.

Ultimately, my goal here is to improve banking competition and to identify bankers who are great for my clients. If you know of great bankers, drop me a note!

Time to name names:

Right now I am sending most of my business clients to ANZ. The credit team understand cash flow lending and they will approve applications for loans displaying sensible risk. They are slow, and they are not cheap, but they are interested in writing business.

I also see evidence of this with NAB, however I am less inclined to send clients there because firstly I am a NAB customer and I've never enjoyed it, and secondly they don't pay brokerage. This is a conflict of interest that I disclose to my clients, and my clients are happy not to go there for the most part. The clients that I do send there, are looked after, though again, things move very slowly and due diligence is very very diligent!

I have CBA looking at a Property development deal that I am doing at the moment and they are performing very well. They are interested in lending, and they have been very open in what they will and won't do, which is great. I am not however taking cash flow lending deals (ie deals secured by business cash flow and working capital assets) as most of the clients I am working with are CBA (assisting with existing bank applications) or bankwest (wishing to exit) clients. The clients that I have who bank CBA are for the most part keen to stay there, which is positive.

Bankwest seems to me to have some very experienced and talented bankers. Where they fall down is that in recent history that have taken on a lot of higher risk clients and this has left their credit department and the bankers a little shellshocked. It is very hard to get deals written here are the moment but I will keep trying as I like the guys that I deal with here.

I am sending a lot of my deals to St George. Trouble is, I can't get one approved. The deals are getting approved, often quite easily elsewhere, so I know its not the deal that's the problem. I don't think St George credit guys understand cash flow lending. I'm told that they want this business, and the Relationship managers I deal with are the most persistent at asking for new client opportunities, but crickey its proving difficult to get a win. I think once you're signed up you love this bank, and that's why I put clients up to them and will continue to. One day perhaps I'll get there.

The bank that I have totally given up on at the moment is Westpac. Everyone I talk to says that Westpac have been shut for the last year or 2 and this validates my experience too. I understand that they see all third party introduced deals as higher risk, and perhaps this is part of the problem. I have lost all contacts as they have got sick of not getting deals approved and have left. I am now at the stage where I can't even get a Westpac banker to return my call. Is it me? All the other banks seem to like my clients.

The one positive thing about Westpac is that I don't get unhappy Westpac customers contacting me wanting a new bank (well I've had one but that's all). Either they don't actually have many customers, which is possible given recent form, or they really look after them once they get on board. If anyone knows a hungry Westpac Business or Corporate banker please send them my way as I'd love to send a few deals to them.

Hope this is helpful.

If you know of any businesses having problems with their bank, chances are there is not a commercial justification for moving, but perhaps a Pearl Financial Services Banker can assist them to way up options and establish what can be done to improve the situation. Give us a call!

Business takes away frustration of bank manager changing....

noreply@blogger.com (Nathan) — Thu, 01 Jul 2010 06:03:00 +0000

Just as you're starting to get to know and like your banker, he gets a promotion. The new banker starts and, with a sign of exhaustion, you start again. Its your 10th banker in 5 years and there is no continuity in your service, even though they tell you there is a file at their office detailing your history.

Sound familiar? This would be one of the main frustrations of any small business owner "the bank doesn't understand my business".

Pearl Financial Services has today launched a new service which is structureed to address this frustration for business owners. Hire your bank manager yourself.

The Pearl Bank Management service provides a Banker that will take over your liason with your bank, freeing up time for management to manage the business, not the bank.

Have a look at the service here...

Is this a service you can see having value? I'd appreciate your thoughts?

Businesses beware when preparing Forecasts

noreply@blogger.com (Nathan) — Wed, 30 Jun 2010 08:21:00 +0000

Beware of the smiling banker requesting a forecast - its a trap!

Well perhaps its not intended to be a trap, but by jingos it could be if you get it wrong. Tell the bank you're going to do $100,000 sales and you only do $80,000 then you look bad. The fact that you only did $70,000 the year before is forgotten. You predicted $100,000 and you didn't achieve it, hence you have put into doubt confidence in your grip on your clients, your market, your product and your finances. The same can be said if you predict $80,000 and you achieve $100,000, but your banker are less worried here because at least you can pay your debts!

But forecast concerns don't just stop at your ability to predict demand for your product and your ability to contain enthusiasm for spending money. Your forecast also needs to give a realistic picture of your cash flow, and this is driven by balance sheet as much as profit and loss. Its all well and good predicting profitable trade but if your debtors and inventory blow out, then your skills as an operational and financial manager are again put into question.

Pearl Financial Services have just released a checklist (click here) that businesses can refer to when preparing their forecast. This checklist is designed to help you consider all the aspects of the forecast hat a bank will be looking at and will go a long way to keeping the bank happy. It might even save you the trauma of submitting a poor forecast, and the hundreds of hours spend curtailing to the bank that ensue as you start to miss targets!

3 Days to Tidy your Accounts

noreply@blogger.com (Nathan) — Mon, 28 Jun 2010 00:23:00 +0000

Any business with Business finance facilities from a bank will know that 30 June in Australia is the day your performance is judged by your bank. Business needs to ensure that as at this date the balance sheet shows the best possible Working capital position available.

This means chasing debtors hard, and keeping inventory as low as possible. No stock refills or orders to be made until 1 July!

The bank measures cash flow as the movement in debt. The more cash the business can produce by collecting debtors, minimising inventory and pushing out Accounts payable, the better your year will look in the eyes of the bank.

Your risk grade will also be advantaged as liquidity and working capital ratios are included in assessment. Risk grade = loan pricing. Focus on getting your risk grade down and you will see reductions in your interest costs.

For any other bank relationship assistance, please don't hasitate to contact Pearl Financial Services.... Happy new year!

Drive Bank Competition; Shop your Bank

noreply@blogger.com (Nathan) — Thu, 17 Jun 2010 03:29:00 +0000

It is well documented that banks are not [easily] providing loans to new Small Business Customers. What I do observe however is that banks are fighting hard to retain the customers that they want to keep.

This got me thinking. If more attractive businesses threaten to leave their bank, unless pricing comes down, then banks will start to feel profitability stress and this will force them to open up their doors to more new business applications.

As a general rule of thumb, a banker needs to write 25% of new business each year just to maintain the portfolio at the same level - ie loans will generally amortise down or move to a new bank every 4 years.

If existing customers also push for price decreases, then this puts further pressure on bankers to meet their profitability targets as the effect is that they will need to write significantly more than 25% more business to stand still. This will impact on senior banker bonuses and this in turn, will put more pressure on Credit to approve more new business.

Its not something that will change over night, but if enough good businesses do this, then it will slowly have the desired effect. In the meantime good businesses will benefit from reducing borrowing costs and transaction fees!

Of course, if you are not an attractive banking proposition, then I would caution you about this strategy as the bank may just call your bluff! If you have doubts, then before you act obtain a Pearl Bank Check which will give you a feel for the likelihood of a new bank being interested in your business (and hence your existing bank being interested in retaining you!).

Please pass this article on to any business owner you know, and together we can improve competition for Small Business Banking!!