Many businesses fail to secure bank funding as they think they lack adequate collateral. However, it seems that banks are more risk loving than they once were.
Martin Balaam, who since April 2005 has turned enfeebled dotcom relic Redstone into a prosperous IT and communications services provider, makes positive bank relations a priority.
He says: ‘My advice would be to first make sure you’re with a bank that you want to stay with, as they’re expensive. After that, it’s crucial to develop a relationship with the right person at the bank. We said to our bank: “We don’t expect a facility right now but these are our plans.”
‘After that, we showed them what we were doing and how we planned to do it. That meant that when we went back to them and asked for a facility, it wasn’t the first time they’d seen our faces.’
Banks don’t want to listen to fluffy sales and marketing speak. Rather, they want you to be realistic about your risks. Balaam finds that they like to see good recurring revenues and high levels of contracted revenues. ‘If banks hear stuff like “there’re no downsides”, they’ll think you’re in cloud cuckoo land,’ he says.
Sometimes a mix of equity and debt is the best way to push your business forward, as Vin Murria, chief executive of Computer Software Group, found after initially using equity alone.
‘In the early days, you will need an element of dilution to get the ball rolling,’ she comments. ‘But if you have got the model right, as you go along, you will end up with a bigger chunk of debt [or cash] and a smaller slice of equity, because the business should be generating sufficient resources for you to use cash flow to fund the bank debt. After that, it simply becomes a virtuous cycle.’
For smaller, growing businesses or those like Redstone, which have been through the mill, bank finance on reasonable terms may not be immediately forthcoming. ‘At the end of the day, [banks] need to know whether you’re likely to deliver,’ explains Balaam, recalling that Redstone had to build credibility with its bankers first. He adds: ‘Once we had a couple of good half years of profits behind us, we negotiated a £30 million bank facility.’
Think outside the box
If you can’t immediately generate sufficient credibility based on performance alone, you might try a different way of getting a foot in the banker’s door. Balaam says: ‘If you’re not on close terms with your banker, a very good way is to get a non-executive chairman or director to assist you. It’s a relatively inexpensive way of accessing bankers. Otherwise you can go through your auditor or broker.’