The starting point for most businesses looking to raise finance is bank borrowing. This is also a useful point to start with in discussing debt finance in general as the banks offer most types of lending services either directly or through their specialist subsidiaries. Discussing how the banks work therefore illustrates in general how the business of borrowing works in the UK, what the issues are, how things are changing and what this means for your business.This then acts as background with which to compare the offerings available from alternative suppliers, discussed over the next two chapters.

Managing Your Bank Manager

The first thing to remember when dealing with a bank is that banks are businesses like any other, albeit large ones. They have their structures and processes, their shareholders, a requirement to be profitable, their products and policies, their employees’ career paths and office politics.

The second thing to remember is that bank managers are employees like any other. They have their place in the organisation’s structure chart, they have their levels of authority, their reporting deadlines, their processes and bank policies to comply with, their targets, bonus schemes, annual objectives and own bosses to think about.

So if you understand how the bank is managing your bank manager and what they are being tasked to do and rewarded for, then you can arrange to manage your bank manager so that you get what you want out of the relationship.

The face of the bank that is most familiar is the high street branch network; however, this is only one aspect of the banks’ operations and for business borrowing purposes most of the banks have segmented their market into three distinct business units, based largely on customer size, and a typical split is now:

The exact dividing points and how rigorously these are enforced will differ from bank to bank.

Within each of these units, customers will be given a credit rating based on a range of factors, from the strength of the balance sheet and robustness of the profitability, to the strength of the management team and robustness of the financial controls and forecasting. Often the length of the existing relationship will be taken into account as banks see their customers as streams of revenue stretching into the future and tend to want to stick with customers who have stuck with them in the past, as they feel it is likely that the customer will continue to do so. A customer with a record of frequent switching to chase the lowest interest rate or service charges (a ‘rate tart’) on the other hand obviously has no loyalty to the bank, and the bank has much less long-term interest in the relationship.

This internal credit rating by the bank is absolutely crucial as this matrix determines how the bank views and manages the relationship and governs, for example:

• whether the bank should consider lending more under any circumstances;
• what interest rates to charge;
• whether to require formal security; and even
• whether the bank should be looking to retain the relationship or should be seeking an exit.

 

At its crudest each of the above business units of the bank will have:

• a good book; and
• a doubtful book (sometimes further divided into doubtful and bad books) which may be referred to as ‘intensive care’, ‘specialised lending services’ or ‘business support’.

Staying In The Bank’s ‘good Book’

The good book represents the bulk of the bank’s customers that the bank is happy with in terms of performance and the bank’s perceived risk. These customers will be dealt with by the appropriate local manager. The bank will have some requirements for information such as annual accounts and forecasts, but these will not generally be too onerous for most businesses. The bank may also be relaxed about taking security, may be predisposed to lend on the basis of an appropriate request and the margin sought on borrowings will be at the lower end of the bank’s scale.

If your business’s credit score starts to fall, you will start to drift towards the doubtful book and you will notice the bank’s approach hardening as you pass down through their matrix. Seeking loans will be harder, interest rates will be higher, security and personal guarantees will be sought and the bank will be looking for more regular information. Eventually, if your business is dealt with by the commercial level of the bank, the relationship will be passed across to the business support arm of the bank, which will have its own managers and reporting structures that you will need to deal with and will be looking to either return the relationship to the good book or to exit.

This is a particular issue if you have a change in your relationship manager. Human nature being what it is, your relationship is at maximum risk during the first three to six months of a new manager’s appointment. They will tend to take a hard look at the portfolio they have inherited to identify and weed out problem accounts while these can be blamed on the previous incumbent and before they become items that have arisen on the new manager’s watch.

You therefore want to ensure that your business remains firmly in the bank’s good book. Remember that:

You do so largely by communicating with and managing your relationship with your bank manager. Remember they are employees with a boss that they have to satisfy. They will have targets to meet and reports to file, so the last thing you want to do is flag your business up as an exception in their reporting or adversely affect their input into your credit rating by being a problem for your manager.

Your relationship with your bank manager is usually one of your business’s key relationships. I am always surprised by the number of business people who have given little or no thought to actively managing this relationship.

Your job is to make it as easy as possible for them to lend to you, which means making your internal credit scoring as high as possible.