Keep your bank informed of your business activities and performance, this ensures that they are ready to respond to any request you may have.
Don’t leave it until it is too late
Avoid any tendency to tell the good side but not the bad side because it impacts negatively on your credibility. Discuss any downward turn in events with your bank as soon as it’s known, not when the overdraft limit is exceeded or loan repayments are late. Remember, while the bank is providing facilities, they are effectively in partnership with your business.
Small business and the Banking Code of Practice
The Code outlines high standards of behaviour and service and enforceable rights for all customers, including small business operators. There is a dedicated section in the Code on small business lending which includes simplified contracts, longer notice periods for customers when loan conditions change and overall improved communication and greater transparency when using valuers.
View the Banking Code of Practice.
Learn how to manager your lender relationship
Annual reviews are really important opportunities for you to discuss business performance with your bank manager.
Being well prepared indicates good management practices and shows the bank you understand their requirements. Information needed for the annual review includes:
- The past year’s financial statements, which you need to compare to your budgets. This comparison highlights any key areas that need further explanation to your bank and provides you with the opportunity to discuss measures undertaken if the variances are unfavourable.
- Any key changes to business operations such as new customers or suppliers.
- A current business or strategic plan for the business, if it is available.
The review will result in a submission to the bank’s administration, recommending continuance or withdrawal of the loan.
If your business has not been performing well and you have not previously advised the bank then you should do so. Explain your position – what happened, when, what plans you have put in place to address the issue, the impact on the terms and conditions with the bank and when you will be able to return to more normal trading activity.
Tell your bank as soon as possible about issues or a deteriorating position. The sooner they know, the more likely they are to be able to provide assistance, such as a possible renegotiation of repayments.
You need to remember that your bank is in the business of banking, not looking for ways to sell up your assets. They may:
- Agree to change your borrowing arrangements to make repayment easier.
- Discuss with you, and if you wish, your accountant or advisers, your plans for improving cashflow and profits.
- Recommend you discuss your problem with your accountant or put you in touch with independent advisers who can help you.
One of the best ways to manage your business is to review business operations regularly. By undertaking regular planning for the business, including cashflow forecasts and strategic business directions, you will be able to identify longer-term issues that may impact on your loan conditions early and implement strategies to stop the problems before they begin. Implementing any actions to rectify the situation early will show your banker that you are managing the business responsibly.
A loan commitment is the lender’s promise to make you a loan under the specific terms and conditions that are outlined in the loan document. Once you have signed that agreement, you are bound to abide by these terms.
Some potential repercussions of not meeting your commitments could be:
- Increase in reporting requirements to the lender
- Increase in fees, charges or interest rate
- Cancellation of the loan and repayment required.
The loan will usually include conditions of default, with the bank being able to request payment if certain conditions are breached.
Lenders will generally provide you a minimum of 30 days to remedy your default.
Some short-term facilities will have shorter repayment periods and may be at call, with the bank being able to ask for repayment on demand.
Make sure you are familiar with your loan agreement as it provides information on what happens if you do not meet your loan commitments.
Before signing a loan agreement it is recommended that you get assistance from a trusted adviser so you are fully aware of your responsibilities and any potential consequences of not meeting your loan commitments.
Before a bank decides to call in a loan, there would normally have been discussion and/or a letter expressing its concerns. If the bank decides to cancel facilities, it must provide written advice that banking facilities have been withdrawn, in which case it will ask that all monies be repaid.