Obtaining credit in today’s market is a bit like a bad old joke. I’ve got some good news, and some bad news – which do you want first? The good news is credit has never been cheaper. With Base Rates at 0.5%, borrowing money is seriously cheap. The bad news is getting hold of any of this cheap money is seriously difficult. Nigh on impossible if you don’t ask for it in precisely the right way. So what is the right way?
First of all, you must have a good reason for wanting a loan or extended overdraft. Funding losses because your business is having a tough time is simply not an option. The bank may still offer to help you, but the price they wish to extract will be so high as to make it impossible for you to agree to their terms. They will want a ridiculous margin, personal guarantees and real security. If the bank asks for a charge on your home, don’t even consider it - just say no.
If matters are so serious that you believe this to be the only option, speak to your accountants/auditors/advisers, and heed their advice. They will usually give you the warts and all advice you almost certainly need but don’t necessarily want to hear.
Have you liquidated every asset within your business that can possibly be turned into cash? It is amazing how much cash you can generate when you really have no option. Can stock levels be lowered even further? Do we need all the cars and vans in the yard? Be realistic but be aggressive. There is no point regretting not taking action whilst you still have the freedom to make your own decisions.
To paraphrase a well known saying: the banks only help those who help themselves.
So you need a plan. One that can be understood by your bank manager and one that he/she will be prepared to argue for on your behalf with his/her credit committee. Prepare a plan that you believe in. If you don’t believe it, no one else will either. Make sure it is a plan that will get you out of whatever the problem is that you are experiencing. It needs to demonstrate that the funds you are asking for will see the business all the way through to recovery/cash generation. Otherwise, the bank will worry that you will be back asking for more at a later date.
Ok, so you have a plan that you believe in and one that will resolve the issues you are dealing with. So what else do you need? The plan must be based on clear, concise, detailed assumptions. Your profit and loss forecast must be for the next 12 months on a monthly basis, with a projection for the following year. It must contain a 13-week cashflow on a weekly basis. The balance sheet ratios need to improve over the period – pay particular attention to your debtor and creditor days to show that you have a firm grasp of everything in your business that can affect cash.
Finally, and most importantly, try and have a Plan B. If you have historically banked with a traditional bank, consider talking to an ABL (Asset Based Lender). But beware the new lender bearing the gift of an easy solution. There will be a catch – which might simply be cost. Talk to your accountants/advisers about the experience of their other clients with any of these banks or ABLs during this recession. Consider applying for one of the supposed recession-beating financing initiatives such as the small company’s loan guarantee scheme.
They are all sharks – but you have to learn to swim with them because they have something you need – cash. Good luck and be careful out there. And remember, this recession will end at some point and your troubles will ease. Remember how your bank treated you when you needed them most – and change banks if they didn’t stand by you when you asked for help.