Some recent headlines generated by one or two of the big banks made chilling reading. At least one bank has implied that they’re looking to wind up small and medium enterprises (SMEs) that are perceived as “not doing well”.
The bank in question undoubtedly has its reasons for that approach, and must appease shareholder concerns about the bottom line. At the same time, SMEs would probably prefer to feel that their lender is working with them, not against them.
Part of the problem is the model that’s used to determine the worth of a business. The major banks conduct fundamental credit analysis on largely historical financial information (a largely rear vision mirror approach to the business) sometimes supplemented by a cash flow projection for a limited view of the road ahead.
This type of analysis hones in on certain financial ratios that are seen as an indicator of the business’ health and the likelihood of servicing the debt.
Small businesses are so much more than just numbers on a spreadsheet, and it takes an experienced relationship banker to find deeper insights. Looking at a business holistically tells us a lot more about not only where the business has been, but where it’s going.
Relationship Banking is essentially a combination of fundamental credit analysis and algorithmic lending with the overlay of experienced credit personnel, who work closely with a client to understand their business.
Understandably, many SMEs’ past experiences with bankers, or just general fear, can make them avoid talking to their lender if they’re concerned about the business.
Chances are, if one of our small business clients is doing it tough, we probably already know because of our existing strong relationship with them and their adviser. If we’re not working with them to help get through it, we soon will be.
In over five years as a business lender, we’ve found that businesses in potential strife who talk to and work with us, end up turning the corner. Those who are sweeping it under the carpet, and having sleepless nights – that can be a different story.
Our focus is always on helping SME owners assess the reality of the business situation and understand the possible solutions. Then the options can be discussed, tested, and implemented.
We often advise our clients to go over their business plans to find ways to:
- negotiate supplier terms on a case by case basis
- improve debtor collection
- either refine and focus the current offering, or pivot into new business opportunities
- run-down existing inventory levels
- reduce expenses
- launch online portals to generate sales
- negotiate rent relief with landlords and close stores.
While it’s true that not every single business in trouble can be saved, it’s only a tiny minority who are beyond help, and usually because the owner has left it too late.
Small business owners are generally resilient, driven, and professional. Many have poured their heart AND their brain into their business. Lenders must be ready and willing to help find solutions, not closures.