Bellingham Wallace Director Cam Wallace reflects on 6 years leading the Business Development function for business banking at BNZ, and shares his thoughts on bank funding for SMEs; in particular why they find accessing bank funding such a struggle and what can be done about it.
SME access to debt – the challenge
Positive cash flow (EBITDA positive) is normally the proxy used by banks to assess a business’s ability to take on and repay bank debt.
If cash flow is negative, a clear roadmap must be evidenced demonstrating when and how the business will generate sustainable positive cash flow, and the assumptions within the roadmap need to be carefully tested and sensitised. The irony is that business growth costs money and as a result, lack of positive cash flow drives banks to view high growth high potential businesses as requiring equity funding, not bank debt.
For cashflow positive business, often the way the case for funding is presented to the bank (i.e., the business story in financial and non-financial terms) is the difference between the bank agreeing to provide or not to provide debt finance.
In many cases, SME management information systems (MIS) are undeveloped and business owners understanding of cashflow is limited. The icing on the cake is that many business owners are inexperienced in crafting their story for the bank to support a funding request.
The best way to unlock a cashflow-positive SME business’s debt capacity is by providing the bank with a comprehensive 3-way financial forecast model with an integrated balance sheet, cash flow and P&L. Using the model, the bank can test the funding case presented and come to an understanding about what is possible. With a model, a business’s chances of getting what they are looking for from the bank increase dramatically, but most cashflow positive SME businesses do not have the capability to produce a 3-way model and there are only a small number of business advisors or accountants that have the skills to create models and help craft the stories suitable for the bank’s needs.
Now is the time to improve the relationship with the bank
Increased wage and salary costs, operating costs, inventory costs, and interest costs have an immediate impact on cash flow which most businesses cannot immediately offset by increasing their prices. The lag will result in good quality businesses breaching facility limits and covenants and this will raise a red flag with the bank particularly if the equity position is light or deteriorating.
The current high inflation environment will be a shock for many businesses and in the face of a quadruple threat of increasing costs, cash management is critical. Business owners who cannot demonstrate a comprehensive understanding of their cash flow will struggle with their bank.
Understanding how to work with the bank and getting the best from them is going to be vital if businesses want their bankers to maintain facilities at existing limits and/or support the application for new facilities as economic headwinds continue to intensify.
Getting the best from your bank
Our goal is to empower SMEs to succeed by using our expertise and connections so businesses can get the best from their bank. We’ll create an integrated financial model in a bank-friendly format and craft your business story into a presentation reflecting exactly what the bank needs to understand about your business, so they have the confidence to support it.
Our deep understanding of the way banks both assess and price risk means we can present and negotiate very effectively on your behalf. We are expert at optimising the structuring of bank facilities and work with all NZ’s main banks and understand their products, pricing, margins, and financial metrics to ensure that you have the right banking partnership.
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