Think like a Banker for better results with your Business Finance applications
When you need new or replacement finance you will often put together a plan for the bank to support your application.
Over the years I have put together many of these documents, and whilst we always try to show a good bottom line for the new proposal, I came to realise some time ago that I was writing the document from my perspective, and not necessarily the person who it was aimed at – the potential funder.
I have now adopted a new strategy when putting together these documents; I try to think and act like the banker who will be reading and assessing the paper.
This involves an enhanced planning process that seeks to put you in the position of the bank representative you will be putting your proposal to.
1. The business proposition
It goes without saying that the proposal has to make sense. It needs to reflect the current economic environment and take account of market developments and trends within your sector. A short Executive Summary is a must!
2. Security
The next thing anyone who might provide funding to your business needs, if the proposal has passed the sense test, will be security.
The primary question will be:
How do we get our money back if everything goes wrong?
Think this through and address it in detail in the proposal. Cover the issue in such a way that they don’t have to come back to you for further information! Don’t fall in to the trap of seeing the business case through your eyes only, and think that there is no chance that things can go wrong. Remember, the banker will have seen a large number of applications in his or her career, and it is a safe bet that some in your sector will have gone wrong, and created a loss for the bank! Following the financial crisis of 2008, they have a completely different mind-set, which seems to be based on fear of getting things wrong, resulting in an over correction of the relatively easy credit available in the mid noughties.
Some questions you might face:
What is the underlying security?
How easy is it to release this security if needed?
How will debtors react in the event of the failure of their supplier?
What experience do the Finance controllers have in the business?
What is the track record of the Directors? Have they had previous successes where the bank has made good fees?
If things have gone wrong in a previous business how have the directors reacted. Have they worked hard to ensure the bank (and other creditors) have been repaid?
What will credit think? Remember no banker is going to take forward a proposal that they believe will be thrown out by credit.
Once the security issues have been covered it is worth explicitly covering off the following headings, based on the Johnson and Scholes acceptability model:
3. Suitability
Is the proposition suitable for the key strategic issues underlined by the organisation’s strategic position?
- Does it make economic sense?
- Would the organisation obtain economies of scale, economies of scope or experience economy?
- Would it be suitable in terms of environment and capabilities?
4. Feasibility
Is it feasible to implement the proposal with the available resources, including funding, people, time and information?
Tools that can be used to evaluate feasibility include:
- cash flow analysis and forecasting
- break-even analysis
- resource deployment analysis
5. Acceptability
Acceptability is concerned with the expectations of the identified stakeholders (including funders) with the expected performance outcomes, which can be return, risk and stakeholder reactions.
Summary
The basics of the proposed template are as follows:
1. A compelling Executive summary
2. Security – how does the funder get their money back
3. Is the proposal suitable?
4. Is the proposal feasible?
5. Will the business model be acceptable to all stakeholders, particularly funders?
As always, if you have any comments or any of your own experience you would like to share on this subject, please contact me at john.thompson@transcapital.co.uk or on 0845 689 8750.
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