Let bankers be your best friends
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hat's Alan Millar's recommendatron for anyone proposing to make a go of a new haulage business in these days of expensive money
ANYONE setting up a new business in road transport needs to make business friends.
The new operator must cultivate the local community to develop custom, must build up a good, relationship with local garage proprietors to guarantee proper repairs and service, and he must establish close liaison with his bank manager.
It is very much in his interest to take his bank manager into his confidence from the beginning.
Many people tend to treat their bank manager as a remote figure to be approached only in times of dire trouble, but he can be a businessman's best friend if approached properly. Remember, you are always competing for a manager's time, and he is more likely to listen sympathetically if he has seen you often in the past and you have been open and honest with him.
If you bring him into your discussions as soon as you begin to formulate business plans, you will be able to build up a picture of what he can and cannot do for you. Perhaps the bank itself cannot offer direct help with a loan, but the manager may be able to direct you to one of his business subsidiaries — perhaps a leasing company — which can assist.
The simplest form of bank borrowing is an overdraft, but it is essentially a short-term facility for firms and ideally the account should fluctuate in and out of credit. If more permanent finance is needed, a loan such as National Westminster's Business Development Loans — may be the answer.
Business Development Loans are repaid over an agreed number of years, and can be used for property purchase or extension, purchase of a business, purchase of vehicles, plant, or machinery, and for additional working capital for a new or existing business. Amounts covered range from for firms, and ideally the are granted usually for up to seven years, but can be extended sometimes to 10.
The length of the loan depends on several factors, some of the more important ones being the expected lives of the assets being purchased with the loan, and the reliability of your cash flow. The present Business Development Loan interest rates are a flat 7.5 per cent on secured loans and 8.5 per cent unsecured for loans of up to five years.
These rates work out at an effective 14.2 per cent and 16 per cent on a five-year loan. Loans for six to 10 years carry a flat rate which is one per cent higher than the five-year rate.
With the big banks' base rates currently at 14 per cent, overdrafts can cost up to 17 or 18 per cent, so the advantages of such deals as the Business Development Loan becomes apparent. But prepare yourself to pay a once and for all one per cent arrangement fee to meet the bank's administrative costs, and possibly having to take out a life policy to cover the amount of the loan. Ap ordinary loan might also be possibility, and the rate here will probably be limited, as A/1th an overdraft, to base rate. The ost may be a bit higher as the uank is commiting itself for an e tended period.
T e biggest advantage of a oan over an overdraft is that it repr sents a commitment by the
Dan While an overdraft is .evi wed annually, a bank is mnli ely to withdraw a loan inle s a business sinks into Jeep financial trouble, and the ban s money appears to be at risk.
Far any of these deals, the Dank manager must know how profitable and viable a business is. Put bluntly, all he wants is his money repaid by the end of an agreed period, and he will look for evidence of good forward planning and effective management information.
A set of accounts and a balance sheet, along with evidence of what has happened since, will give him a picture of how the business is shaping, and he may be able to provide help for firms with costing and cash-flow forecasting methods. As part of their customer services, many big banks have simple forms available to help businesses plan their finances.
The manager isn't just looking for stark accounting figures. A sensibly planned fleet replacement policy suggests that a business is organised along logical lines, with lorries being replaced after a given period rather than on one desperate purge when they become horribly uneconomic to maintain. Such rushed efforts don't always coincide with money being available from the bank.
Evidence of good contracts will also be important to the bank manager, and he may have good cause to shiver if you only have one contract. If it is a coach operator's contract to carry schoolchildren, then it may be a fair bet and you may be able to hang on to it. But few bank managers today would be happy if that contract was for carrying steel from Shotton or Corby.
He is unlikely to view an owner-driver any differently than a larger concern, provided that the owner-driver sells himself properly. Obviously, if he is a professional lorry or coach driver already, the bank manager will have fewer qualms than he would have with someone completely new to the business.
Also, the banker wants to know that he is lending to someone who has the knowledge, skill, and character to withstand and cope with the demands of running his own business.
The manager may want security if you are new to the business. This can take many forms, and perhaps the most obvious one to the private individual is his house, but there can be .problems and bankers are never very happy to do this.
A recent court case raised issues about mortgages being taken over matrimonial homes, and banks are keener than ever to ensure that if the house is in a sole name, anyone else having an interest in the property, including an owner's wife or husband, consents to the giving of the charge. In any case, no banker ever wants to lend knowing that he might have to realise his security, especially if it is someone's house, and he will bend over backwards, I was told, to avoid doing this.
For larger businesses. a floating charge giving the bank security over all assets of a business, including goodwill, stock, buildings, and vehicles, is another option. This gives the bank the power to appoint a receiver if the business does run into financial trouble, but again this will be a last-ditch measure.
Banks also help by making credit inquiries. While no banks will divulge any specific information about its customers, a bank credit inquiry can often indicate whether or not it is worth proceeding with the deal.
Often, the replies received are as confusing as the companies' finances, and it is essential for the bank manager to tanslate jargon into plain English. For instance, "Respectable and considered good for your figuresis a good recommendation, "Respectable but resources are fully employedis less good, and -Cannot speak for your figures" is something approaching bankers' jargonese for "Don't touch it with a 10ft bargepole.But a bank manager is someone with whom you should maintain close contact if you are to develop your business along sound financial lines. He can be your best friend.