When Should I Negotiate with my BANK?

By Ian Robinson

By popular opinion we will outline three key scenarios about when you should consider negotiating, when you should hold your position and when you should (consider) walking.  I must throw in a caveat that there are 50 shades of grey in between these generalisations, but at least this precis should garner some discussion.


Onwards and Upwards

For businesses borrowing north of $2.0m, the annual review is a risk mitigation process by the banks to flag any early warning signs the borrower maybe experiencing financial distress.  It is also a compliance driven process, reporting to APRA.

What does all this mean for the commercial borrower?  If the borrower’s credit profile has improved, then the profitability of the bank increases given that the bank can reduce their liquid assets against that loan.  But only if the bank fails to pass on these credits to the borrower.

I will be willing to publish any story online where a bank has volunteered, without pressure or duress from the borrower, to reduce their interest rates on the back of improved commercial trading after an annual review.

These scenarios are certainly times to renegotiate your funding position with your bank.  But first, know exactly why this is appropriate in your situation and arm yourself with constructive and relevant leverage to maximise your return on your negotiation.  As you generally only get one swing at the ball to knock it out of the park.


The Power of You

At a peripheral level, banks are seeing their credit growth fall in addition to their Net Interest Margin (profit margin) compress in a double whammy blow to their shareholder reporting.  Losing good quality business clients then becomes a professional failure on the banker’s part.  If your business has inherited “margin creep” over the years because of your admirable bank loyalty, and your business has still been trading on a similar trajectory, then this still may warrant a negotiation with a material positive outcome.

From a macro-economic viewpoint, domestic and global trading conditions are contracting.  If your pro-active stoic management has maintained status quo performance, your business now becomes a more sought-after commodity from a bankability perspective when benchmarked against your peers.   Other banks, by attrition from these difficult trading circumstances, become more aggressive to refinance good quality businesses in attempt to achieve revenue targets.  Hence, failing economic conditions now becomes your leverage.

Renegotiating your banking facilities is another way of future proofing your own net trading margins, which is no different to what the banks do on a year on year basis with their margin creep.

Once again, know your position with the banking fraternity, as knowledge is power when it comes to negotiation.  Same rule applies, one swing only.



The Liquidity Squeeze

A shortage of cash flow and working capital can be derived from several factors.  Late paying debtors, rapid expansion directing your working capital into capex or tough trading conditions.

Regardless of the cause, the effect is the same.  If the lender was supportive in providing additional capital, then there would not be a liquidity squeeze.  Hence, in most situations the analysis would need to be forensic to ascertain true cause, viability and a strategic directive to a funding solution.

To effectively work through this timeline, it is imperative for the borrower to pick up on the cues and act early.  Time is a currency that depreciates exponentially.

Non-traditional debt may need to be considered as a part of the overall solution.  We would recommend professional assistance and guidance if more complex funding solutions are required to navigate the path back to funding stability.

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