Andy Thomas, Partner

Thought leadership

8 things to consider before you approach your bank

The Coronavirus epidemic has, amongst other things, had a dramatic impact on the cash flow of most businesses. One important area of opportunity to alleviate some of your cash flow constraints is of course your bank so, from the perspective of a former banker during the time of the last credit crunch, here are 8 things you might want to consider before you engage with them.

1. Approach the new CBILS lending scheme as you would any other request for bank funding

Details of the new scheme set up by the government and delivered via banks and other lenders are still emerging, but it’s clear that these are loans rather than handouts, and you should talk to your bank in that context. Unstructured approaches aren’t likely to be fruitful. Instead consider drafting a note about how you were trading prior to the pandemic, the manner in which the crisis has affected your business, the mitigating actions you have taken to deal with the operational and financial impacts, and what further levers could you pull if needed, as well as your considered view on what the impact might be on your market once the immediate crisis has abated. Nobody will expect you to be able to predict the future, but you can be clear about your best estimate assumptions. You will need to provide numbers so be prepared with short terms cash flows, recent management accounts, debtor and creditor lists, and forecasts that reflect your current view of the world.

2. How will a bank assess credit risk when there are so many unknowns?

These are unprecedented times for banks as well, so they will be trying to establish their credit approaches in real time. If I were still in banking, I would base my judgement on:

1)  Would we have lent to the business before the crisis?

2)   What impact might the pandemic have on the relevant sector for the long term? And

3)  Does this management team have the right approach, controls and agility to navigate through this situation?

Point 3, and more generally getting a bank on board in difficult times, can be as much about how you say something as what you say, so try to communicate both written and verbally in a cool, calm, professional manner, albeit acknowledging the severity of the situation.

3. Don’t let CBILS distract you from other financial support the bank might provide

In the clamour to understand the new scheme, don’t lose sight of other opportunities with the bank. These might not individually unlock as much capital as a new loan may, but often the way out of a liquidity issue is found in achieving lots of small gains rather than relying on one big solution. With that in mind, talk to your bank about:

  • Capital repayment holidays and interest roll-up on your existing loans and HP;
  • Additional credit card facilities. Often a bank might already have a pre-agreed higher credit limit in place as contingency;
  • Temporarily going over your overdraft limit. If you agree this in advance and explain which receipts are due to correct the excess position, a bank will often be sympathetic;
  • Any facilities that you have in place but don’t use, like letters of credit, guarantees or forex hedging. Agreeing with your bank to reduce or remove limits on such facilities might give them the flexibility to reallocate that credit to a higher overdraft or loan;
  • Relaxing lending formulas on working capital facilities, and temporarily waiving financial covenants on loans;
  • Any security the bank has that it might release in full or in part to another lender. A bank might have a debenture in place, but this may capture assets they don’t place much or any reliance upon, such as stock or even debtors, which you might be able to use to raise finance elsewhere.

4. Your Relationship Manager is a person too

Consider when you approach your bank that they too will be under significant pressure, both at home through concerns for loved-ones, financial pressures and a new way of living, and at work via dramatically increased workloads and covering for absent colleagues. It’s also true that your Relationship Manager will have found out about the new lending scheme through a public announcement at exactly the same time as you did and are themselves still desperately trying to understand how it works. That doesn’t mean the bank doesn’t have a duty to engage properly with its customers but approaching them with some empathy and making it as easy as possible for them to help you by providing good information is invaluable.

5. Think about what other lenders are out there, but tread carefully

Approaching a high street bank which is not your own at the moment is likely to be tricky, as they will be focusing on supporting their existing customers. However, one major difference between this crisis and the 2008 credit crunch is the myriad of so-called Alternative Lenders seeking to put cash to work. It’ll probably cost you more but that might be worth it if it helps your business get through. One of the challenges is finding the right one for your situation amongst the various Debt Funds, Peer-to-Peer Lenders, Asset-based Lenders, and innovative fintech propositions, and you can waste a lot of valuable time trying to connect to the right one. Your Local Growth Hub can be a good source of intel, as will your accountant and other advisers and we have included a link here to the Finance Hub by the British Business Bank. Beware though that there are rogue funders out there, particularly in the unregulated areas, so do your due diligence on who you are getting involved with.

6. Prepare yourself that your bank may want to transfer your account into their distressed lending unit

This isn’t necessarily the doomsday scenario you might fear, because often these units are more experienced and as a result have greater discretion to provide support outside of one-size-fits-all credit policies. It is a step that a bank doesn’t take lightly, so you should take serious note. Dealing with this sort of situation is a subject matter all of its own, but in the first instance do consider getting some external advisory support to help you. Banks have significantly reduced these restructuring departments during the relatively benign recent years and will now be trying to reallocate resource to scale them back up. If you’re reading this then you are probably intimately aware of the challenges of scaling any business quickly, and that’s more so when much of the workforce will be working remotely, and subject to rising levels of sickness absence. There is a danger in such circumstances you might end up in limbo between ‘good’ and ‘bad’ bank for a prolonged period of time. Keep being proactive with them, so that your account doesn’t fall between the gaps, and keep a record of when you’ve contacted them.

7. Try to bite your lip with the bank-bashing

It can feel frustrating that banks were given support when they needed it but might not support you now, or maybe you feel the bank’s approach to the new lending scheme doesn’t seem to match the expectation set in the initial announcements. By all means talk about that frustration to your colleagues and friends, or ring me and I will happily listen, but please get it all out of your system before you call your bank: it won’t help.

8. Get external support if you need it

Every penny counts in a liquidity crisis. There are lots of people who will happily share advice, opinions, and contacts for free, and you should use your network to good effect here. But it would be a false economy to try to save paying some fees if it means potentially jeopardising your chances of raising finance because you don’t get your approach right, or if doing so causes you too much distraction from stabilising other aspects of your business.  Debt Advisory and Corporate Finance teams will likely have more capacity now as the M&A market slows down and utilising their skill sets might help you get more finance, more efficiently.

Of course, there are many other areas to investigate to support your cash flow, not least the various government initiatives that have been announced in recent days but talking to your bank should always be one area to look at. We’re working hard to support our portfolio with the challenges some of them are facing, but we’re always happy to talk and share ideas with others: we might be increasingly self-isolating, but we are all in this together.

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