Chris Marston, head of Professional Practices at Lloyds TSB Commercial, talks about how bankers make lending decisions and how you can maintain a productive and cordial relationship with your bank.
- Customer standing and background - we consider how long the firm has been established, how well we know it and how well placed it is to face the future in terms of staff and premises, succession planning, business mix and competitive issues. We look at the track record and experience of the firm's management team and assess its ability to be effective in changing economic conditions. We look the firm's accreditations, such as Lexcel and CQS. We consider whether management is prepared to take external advice from accountants or other advisors, and whether previous lending arrangements have been honoured.
- Purpose and amount - we assess the business case for the borrowing, what contribution the firm is making and whether the borrowing structure is appropriate. We want to see a matching of maturities; for example a loan for computer equipment with a lifespan of five years should not have a repayment period of seven years. We consider how the proposition fits with our credit policy and take into account any regulatory issues.
- Financial performance - we'll need to see certified or audited accounts, and regular management information (see the main components of an information pack below) to understand the trading fortunes of the firm and the nature of lock-up. Many firms provide us with profit & loss accounts, but few offer balance sheets except at the year-end. Cash flow forecasts, budgets and new instructions data complete the picture.
- Repayment capability - it's important for a business to demonstrate it can repay; that its forecasts are robust and stand up to sensitivity testing. Don't sensitise the forecasts before sending. We look at previous forecasts provided by the firm and assess how accurate those proved to be. I've heard solicitors say that it is impossible to prepare a cashflow forecast for a law firm. I disagree, and I know plenty of specialist accountants who can provide practical help to lawyers who don't have the expertise or the time to do it. Whatever your forecast says, don't forget to show that you have a plan B!
- Security and risk protection - we want to know if the firm can offer security. It won't persuade us to lend unwisely, but it may help you negotiate a better deal. We want to be sure the firm understands and has addressed the risks it faces, such as a rise in interest rate, or the death or disability of a key person. We need to know that there is an effective insurance regime and a disaster recovery plan. Lexcel and CQS are seen as indicators of a firm that manages risk effectively. Some of our customers seem surprised at these questions, but if repayment depends upon the continued uninterrupted profitable trading of the business, then protection against these risks is critical.
- Terms and conditions - once we have agreed to lend, the discussion turns to interest rates, fees and where appropriate, performance covenants. Post-lending monitoring processes will be agreed and any pre-conditions explained.
- Manage your bank manager - these golden rules, if adhered to, will lead to a productive and supportive partnership:
- We don't like surprises. Tell us the good news and the bad.
- We don't lend blind - we need high quality information and regular dialogue. Provide management information on time so it doesn't have to be chased. It's reasonable for you to expect your bank manager to acknowledge and comment upon the information you provide.
- We don't want an entrepreneurial stake. It's your business, and for a lender, repayment is as good as it gets.
- Show commitment and leadership. What's your stake? How are you demonstrating your commitment in financial, behavioural and leadership terms? How ready are you to champion new ideas and disciplines? How does your team view you?
- Have a plan, know it and articulate it (and have another in case the first one doesn't work).
The main components in an information pack from a solicitor
- Profit and loss - with comparison to budget and comments on material variances.
- Balance sheet - to help the bank to understand movements of fixed and working capital as well as the drawings position.
- Working capital analysis, to include:
- work in progress
- debtors
- disbursements
- creditors
Each of these should be analysed by age and also by fee earner/department/branch office as appropriate for the type and size of firm. Creditors are all too often ignored - there could be pressure here, or conversely solicitors, keen to be seen as honourable, could be paying too quickly.