Is Your Business Bank Keeping Up With You?
It is recognised that businesses go through various stages of growth. Some say that there are five stages of growth, some say seven, others say ten (or maybe more).
If you search ‘stages of business growth’, you will find many articles and charts – an example follows:
The theory behind the stages of business growth, is that a business has a certain level of resources (physical, systems and human). The business tends to grow the limit of its resources and then hits capacity issues (otherwise known as 'growing pains). At this point, the owners need to make a choice, expand capacity and continue to grow, or stay the same (and eventually decline).
In the same way that businesses have different growth stages, they also have different stages of funding. The pattern is not always typical however, an example may be:
Start-Up: Owners equity
Initial trading: Equity and re-investing cash flow/ operating profits
Getting momentum: Some bank debt, supported by owners’ equity
Growing: A portion of the bank debt secured by the business assets. Outside equity may be introduced (maybe through listing or buy-in)
Professionalising: Business finance becomes stand-alone (there is no link to the owners personal assets).
Transitioning between each of the stages creates a different funding need – and potentially some ‘pain’:
Start-up > Initial Trading
At this point, the business owner has invested the initial seed-capital and they are looking to generate initial sales. Working capital is typically provided by the owners and all available cash is reinvested back into the business.
Initial Trading > Getting Momentum
The business is starting to establish a track record and hopefully is starting to generate maiden profits. The business is growing, which often consumes working capital. At this time, the business owner is typically looking for more funding to help the growth and turns to a bank for support. The bank recognises that there is a ‘good little business’ and starts to provide some funding, secured by the owners personal assets (typically their house).
Getting Momentum > Growing
The business is continuing to grow and is continuing to require more growth finance. In addition to working capital, the business may have to purchase property, plant and equipment, IT and vehicles. At this stage, they might access some finance, secured by the business assets. An example would be equipment finance (secured by the assets).
Somewhere in this stage, the business starts to outgrow the owners personal assets. As an example, the business might have an overdraft & term debt secured by the owners’ house. At some point, the debt can start to grow past the value of the house and the bank starts to get concerned that they do not have enough ‘security’ to cover the loan.
Growing > Professionalising
The business has now been running for a number of years and is established.
Growth strategies might include the purchase of a competitor, expansion into different markets (for example exporting or opening interstate/ overseas offices). The business might take on equity from outside sources, it might consider listing on the ASX and/ or additional debt. At this point, the business owner is typically seeking to separate their personal assets from the business.
Has the bank relationship kept up with the growth?
In many cases, the business first established the bank relationship, at the “Getting Momentum” stage. The relationship has therefore been in place for a long time. The business owner might have met with the bank at least once a year “at annual review time”. At “annual review”, the bank obtains the previous years financial statements, they might ask some questions about the financial performance. They complete their review of the financial statements and the facilities are renewed for a further year.
Despite the fact that everything seems OK, there is often a point that something seems to go wrong. We frequently hear comments along the following lines:
“The bank does not understand my business”
“The bank is taking so long to make a decision”
“The bank is making me jump through hoops”
“The bank has said no”
“I’m so frustrated”
Why is this happening?
There can be a number of reasons.
1. Banks segment their clients on the basis of borrowing size/ revenue/ complexity/ industry (different banks have different segmentation rules).
The bank might have a business segmented incorrectly. The business might have become too complex or too large for the relationship manager, or the bank might not have realised that the business needs more specialist industry support. For various reasons, the relationship manager might not want to hand-over the relationship, but they do not have the expertise to get the right outcome for the business.
This is where business owners say “the bank does not understand my business”
2. The bank is expecting to receive information in a certain format, but they do not get the "right information".
At some point in time, the bank expects information to be presented in a certain format. As the complexity and size of the funding increases, the bank expects increasingly complex information. Sometimes the nature of the information (and the reasons for seeking the information) is not made clear. The bank interprets the ‘lack of information’ as a risk and declines to support the finance.
This is where businesses might say that the bank is making them ‘jump through hoops’.
3. The loans are structured incorrectly
The loan structure may have been put into place many years ago. As the business grows, its finance needs change and it ends up with a loan structure that no longer works. When this happens, the bank often continues with the same structure until such a time as the business requests something different.
Many businesses do not understand that banks generally don’t make wholesale changes to the loan structure without such a request. Usually changes are made when a specialist is engaged by the business to review the bank facilities and a specific request is made to the bank. This request needs to be very specific and linked to the future growth strategies.
Where the structure is wrong, business owners might say “the bank is taking so long to make a decision”
4. Individual banks have a different risk appetite for certain industries:
The most high profile example of this is the Property Development Industry. Following the GFC, many banks effectively stopped lending to this industry and actively encouraged existing clients to reduce their loans.
“The bank has said no”
“I’m so frustrated”
If you are a business owner and you are experiencing any of the above frustrations, alternatives are available.
Proteger Consulting is a specialist business finance broker. Our typical clients are businesses, who want to concentrate on growing and running their business, with the assurance that they have the financial backing to sustain the growth.
If you would like greater financial certainty, please give us a call to arrange a time for a business finance health check. We will review your current position, your future strategy and let you know what is available.