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Empty accounts

Posted by: John Toppin - Nomizon Associates

Date added: Wed 13 Jul 2011

Bankers may be giving an impression of a return to normality, but for many businesses, including creative businesses, a shortage of capital is throwing them on the mercy of their financiers.

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According to the Business Monitor – which is being used by the Business Department to benchmark the treatment of small businesses by banks, 28% of firms were turned down when applying for a loan last year. A similar proportion failed to secure a loan at the end of the lending process, even after some revised their applications.

In contrast, just 4% of firms said they were rejected in 2007. Only 40% of the small and medium businesses planning to secure new or to renew existing finance in the next 12 months saying they were confident of succeeding last year the figure was 70%. Are you concerned there’s enough working capital in your agency?

In the good times many agencies acted as unpaid, unsecured bankers to their clients. Many still are. Sharpened management of working capital has become an essential component of the armory of every firm. Effective techniques to control debtors and work in progress better will, of course, reduce the level of working capital you need to seek from your bankers to plug the gap but will not eliminate it. Your firm may now need more access to its overdraft facilities. As many bank managers are under pressure to increase bank income or reduce the bank’s loan book, if you don’t prepare well for meeting the bank manager you may be in for a surprise. Understand your numbers Bank managers like transparency and firms that are clearly in control of their finances.

If they don’t understand your business or the numbers they will find it difficult to support you. Make sure you are able to explain the business story behind the numbers. Work in progress and debtors If your current work and pipeline are in decline, the level of work in progress is likely to be falling too. The bank manager will be wary of linking your overdraft facility to work in progress and debtors if he is concerned that your balances include work which is likely to be unbillable or uncollectable – so review these balances critically.

Facility letter The overdraft facility letter is an important document. Ensure that you are familiar with all its terms. If you have underutilized your facility in the recent past, the bank manager may seek to reduce it unless you can demonstrate that you will need access to that level of funding in the future. The bank manager could also suggest tightening the covenants. This gives the bank more opportunity to withdraw the facility later as the covenants will be easier to breach, although he will not say this. Review your performance against the covenants, actual and projected, and model the tolerance levels you are operating with. The bank manager may attempt to impose increased bank charges for providing the facility or in the event of breaches of covenant.

Being well prepared for the meeting will give you more negotiating room.

John Toppin - Nomizon Associates logo