For Richer for Poorer

Tough economic times and the Canterbury quakes have tested the bonds between businesses and banks like never before. But like a good marriage, most of these relationships have been strong enough to weather all storms. Glenn Baker reports.
usiness owners around the country need little reminding that the past three years have been tumultuous to say the least. Trading conditions for the majority of firms have put all sorts of strains and stresses on their financial performance – and, in turn, the relationship with their banks. Fortunately, the old-style relationship between bank and business – when business owners rarely heard from their bankers and were called in ‘for a cup of tea’ only if there was a problem to deal with – is long gone. Nowadays, relationships between business owners and their account managers are much more open, with a higher degree of trust – which puts the businesses on a far more solid footing in the face of uncertain times.
“The challenge and uncertainly of the last couple of years has encouraged business owners and banks to partner together and work more closely on the issues facing the business, almost like a marriage,” says Anthony Healy, director, BNZ Partners.
“BNZ has learnt from previous downturns, and is focused on exploring all alternatives for their business customers. For us, the relationship between businesses and BNZ today is much more of a partnership approach, with businesses better understanding how their bank operates. This deepens loyalties between customers and the bank and works to assist them through difficult times. It also positions them to take advantage of opportunities, and banks have learnt about the importance of taking time to truly understand their customers’ business.”
It all boils down to good two-way communication (to take another leaf out of the ‘How To Strengthen Your Marriage’ guide book).
“The recession has highlighted the need for clear and open two-way communication between banks and their customers,” says Nick Stanhope, general manager Business Banking for ASB. “Banks will do what they can to help customers in financial difficulty – but support options are more viable if banks are made aware of issues when they first arise.
“We aim to ensure our customers have regular financial health check conversations with their business account manager. However, we also encourage customers to pick up the phone and talk to their account manager as often as possible.” 
Stanhope suggests that businesses make use of everything a bank can provide, including Internet banking facilities, economic outlooks, industry news reports, cashflow forecasting tools and business planning tools. 
Stanhope also says they are seeing continued weak demand for business lending as businesses focus on debt de-leveraging and contraction. He says businesses generally fall into one of the three following groups:
1. Business as usual – businesses in recession-proof industries usually have experienced either slight or no impact from the economic downturn. For example, some parts of the health sector have been less affected than many other businesses.
2. Businesses that are struggling – banks continue to put more resources and focus into working with these customers to provide advice and support to enable them to trade through the rough period. 
3. Businesses in extreme financial difficulty – these businesses may be in default on loan payments and other financial obligations. These business owners often need to undertake a restructuring arrangement or exit strategy from their business. Banks will work with them to offer advice and support through this process. 
For a non-banker’s perspective, we asked Doug Haines, a Wellington-based partner at accountancy and advisory firm BDO, if he’s noticed any change in attitudes and policies by the banks towards business customers since the recession hit.
“Banks appear to be a lot more focused on ensuring that their customers have what they call good ‘governance’ – a term which doesn’t just include stewardship, but also robust reporting systems and confidence in the decision makers,” he says. “It seems unlikely that banks will lend based on bricks and mortar only these days; they also want assurance over the health of their customers’ financial management. Business plans, budgets and cashflow forecasts are now a pre-requisite for most levels of funding.”
Strengthening bonds
Things aren’t all rosy of course. Banks and businesses haven’t got a perfect relationship sussed yet – there’s still some work to do.
“The most important aspect of the relationship is the exchange of timely and accurate information,” explains ASB’s Stanhope. “Businesses often produce accounts for tax purposes, but these accounts may not assist businesses in really understanding their future cashflows and profitability and making decisions early on to optimise their position. While financial accounts are important, their retrospective view is a little like driving a car while looking out the back window. 
“Forecasting, based on the realities of the current and future business environment, is equally important.  We encourage customers to forecast their cashflows to ensure they are ready to talk to their bank as soon as possible when they see future possible issues.”
ASB has developed a tool called Business Cash Plan that can help business customers understand their future cashflows, adds Stanhope. “This is a valuable tool to help business owners manage financial risks. We also suggest that business owners take insurance to protect themselves from events outside of their control.”  
Business generally is still carrying some scars of the recession and an uncertain economic outlook is making many reluctant to invest, says BNZ’s Healy. “We always encourage customers to be as open as possible, and share their issues, challenges and opportunities with us. The earlier we understand these, the better positioned we will be to help. 
“Conversely, the onus is also very much on us to make ourselves approachable, easy to deal with, and make sure we are proactive in getting the right expertise in front of customers at the right time,” says Healy.
It’s important to remember that customers don’t always have an obligation to provide their bank with information, says BDO’s Haines. 
However, there are benefits in keeping the bank up to date.
“From a pre-lending perspective, banks are keen to understand ‘where the cash has gone’, not just the business’s trading results.” These can produce two totally different results, he says. “Where trading history reports against the Profit & Loss of the business, analyzing cashflow considers the Balance Sheet as well, which might include outflows of drawings, capital expenditure, tax payments and debt repayments.
“We have designed a unique reporting tool that helps business owners understand their financials through the use of KPI reporting using graphs, and fulfils banks’ needs by addressing where cash has gone,” says Haines. “Therefore, we have witnessed an increase in the level of reporting covenants for new loans. Generally these requirements are no more onerous than what we would expect a business to report on anyway. However, we also come across businesses that have grown over time and are still trying to make decisions based on end of year accounts. They often need a hand to understand that they have now “grown up” and need better systems (that generate, as a minimum, monthly management reports) in order to make informed decisions.”
Fostering a good relationship with the bank is important, continues Haines, given that the lending process has evolved to include a greater deal of assessment around the owners of the business.
“We encourage our clients to involve their bank in their governance meetings on a regular basis. Banks do have the ability to share their knowledge of industry trends, and products that might be applicable. Business owners can also understand the bank’s appetite for a transaction perhaps sooner rather than later, and what they would need to do to have financed approved.
“Obviously the more the banks are provided with relevant information, the easier it is for them to approve finance, with potentially less conditions.”

Capital pains
Securing business funding isn’t always the easiest thing to do even in the best of economic times. So how has the playing field changed since the recession?
“Many businesses are paying down debt instead of taking it on,” explains Healy. “However, the key difference now is that when a borrower asks for more funding, banks are probably asking for better quality information and asking more questions than they would have done before. I think this is prudent and healthy, and enables us to understand our customers and their challenges better. 
“My encouragement to business owners seeking funding for growth, is to share information with their bank as early as possible, and be prepared to show how they would manage through different scenarios.”
Prior to the recession New Zealand relied more heavily on offshore funding markets, says Stanhope. “In the wake of the recession this reliance has been increasingly tempered by a drive to increase local funding, reinforced by changes to the Reserve Bank’s policy on prudential liquidity. Banks have reacted by increasing their retail deposits, which has provided some competitive rates of return for investors with funds,” he says.
“Larger businesses are able to use the capital markets or private equity funds to secure capital for growth. Smaller businesses often start with the owner’s funds raised from selling personal assets which are then invested in the business. Other strategies include taking less out of the business and retaining earnings for growth capital, or seeking shareholders to invest in the business. 
“In the current market, a prudent approach to funding growth is achieved through a mixture of equity and debt, as opposed to borrowing solely to fund growth,” says Stanhope.
The difficult trading conditions and changing business environment appears to have spawned a number of new products and services for the bankers to woo customers with.
BNZ, for example, has recently launched a new online invoice finance product, which allows business customers to access funding up to 80 percent of the value of an invoice as soon as that invoice is issued. This particularly suits growing businesses and those with significant working capital requirements.
“BNZ is also halfway through rolling out a network of 31 new business centres, a place where business owners and their customers can come together to do business free of charge,” says Healy.
Over at ASB, providing customers with real time information has been a big focus. The bank has been using technology to provide tools such as fast alerts – which let customers know through text or email messages that money has arrived into their accounts, or has been withdrawn, or if they are overdrawn.
“Many business owners find cash forecasting a challenge, so we’ve developed our Business Cash Plan tool, which enables customers to more accurately forecast their cashflows,” says Stanhope. “We also have numerous channels of communication open to our customers. Last September we launched what is believed to be the world’s first virtual branch on Facebook. We have received overwhelming positive feedback from customers and the most common theme is the convenience of being able to chat to ASB while using Facebook. In total 99 percent of customers who have visited our Virtual Branch would recommend it to their friends and family,” he says. 
“We’ve been using Twitter since early 2009 and we see our activity in the social media sphere as an integral part of our conversations with customers, including business customers.”

Going forward
Economic predictions can be a little shaky in light of recent events. However, BNZ’s Healy is hopeful of a recovery in general economic activity later this year. “Without doubt, this will present excellent opportunities for businesses in key industries such as, export, infrastructure and construction.  The good news is that BNZ is very much open for business and keen to support customers take advantage of the opportunities that will inevitably present themselves.”
According to Reserve Bank lending growth data, lending growth to businesses was negative for the last 12 months, says ASB’s Stanhope. “The events in Christchurch will also have a negative impact on businesses, at least in the short term.  However, a recession affects different segments of the market in different ways, and not all sectors of the economy will be affected to the same degree. 
“Asset finance has shown growth recently, and we’ve seen increased interest from customers looking to buy essential plant equipment to grow their business.”
As for the relationship between businesses and banks, BDO’s Haines believes reporting requirements will stay and banks will be interested in easy to understand accounting reports, like KPI dashboards. Covenants (for example, interest cover) will be reviewed more regularly and breaches acted upon faster, he says.
“Banks will still compete and so a business with a good financial position and sound financial management will get good credit terms. And bank managers will be more mobile and more interested in businesses and their owners.”

Glenn Baker is editor of NZBusiness.