Bank manager seems grumpy?
There’s good reason because the world has changed and private business owners might become the “innocent victims”…
Let’s start with an example
Your business loan of $1.4m is secured by a commercial property that you bought for $2m in 2007. Business continues to run well after you tightened the belt when the GFC hit in 2008.
For no apparent reason, your bank manager wants you to get the property valued. You know that it has fallen a bit but you weren’t expecting the ultra conservative $1.5m value that came through. Worse, the bank has now changed their Loan to Valuation Ratio (LVR) from 70% to 60%.
So your property now only secures ($1.5m x 60%) or a $900k debt. You still owe $1.4m and you’ve got a problem. Join the club.
Australian banks may have weathered the GFC far better than banks in other parts of the world but right now they are risk averse, avoiding anything to do with commercial property, charging bigger margins and seemingly not looking for new business. In fact, if your banker is giving you a hard time, don’t expect to get a sympathetic ear at one of the other banks.
Right now, the smart strategy is to understand their position and structure yourself so that you remain friends. This involves looking carefully at your facility, your security and your agreement with your bank. It’s time to review those arrangements.
A good place to start is to dig out the Letter of Offer that your bank sent you. That’s right, the one you simply shoved into a file without reading it. Make sure that you fully understand:
- What security is covered by this arrangement?
- Does it include family assets?
- Does the bank have an appreciation of the value of all assets within the business?
- Has the bank risk rated you correctly?
- Have you or any of your family group provided any unnecessary guarantees?
- Have you inadvertently undone asset protection work undertaken over many years?
- Are your facilities matched to your requirements and are they in the right proportions (overdraft, invoice financing, commercial bills, leases and HPs, trade refinance, guarantees and letter of credit), to suit your short term and long term financing requirements?
- Is it costing you too much?
What about your covenants? They typically set rules about your interest cover (normally your EBIT needs to be two times your interest as a minimum), your drawings from the business (they want to see at least 30% of after tax profit retained in the business) and sometimes tangible net worth/capital adequacy.
They will also set a requirement for reporting. Increasingly, we see the need for full three way forecasts (integrated income, cash and balance sheet forecasts) and reporting.
Frankly, these reports offer a sensible approach to understanding and tracking the performance of your own business. But things can go wrong in the best businesses. The GFC saw a number of our clients profitability fall in the financial year ended 2009. In some instances, that fall caused a breach in both interest cover and drawings covenants.
The impact of a breach will largely depend on the severity of the breach, subsequent events and never forget, your attitude.
In extreme cases, you may be moved into the credit watch area of your bank. If this has happened to you, you need help. In our experience, that can often be the end of the relationship with your bank. They may not want you any more. Hopefully some other bank can be convinced to take you on.
Remember, you are borrowing their money. They want to know that you can service it and that you have adequate security. Even a blip in your financials can cause your loans to be flagged as “early warning”. The best defense is regular and ongoing communication, a good understanding of their requirements and an empathetic relationship with that grumpy manager! Remember, he or she is your best friend!