While small firms struggle for cash, High Street lenders are being portrayed as villains. So how do you build trust with your bank while keeping a business on track?

Simon Lawrence is a small-company boss who likes being taken out to lunch by his bank manager. But Lawrence, chief executive of Information Arts, a direct marketing company with a £5.5m turnover, has worked hard to get the annual invitation.

"We invite the bank manager to review our business plan and we present our annual budget to him as though the bank were a shareholder," says Lawrence. Over the years, he adds, working on this close relationship has helped the bank to understand the business better. "The bank trusts us and the manager knows that he's dealing with a competent management team."

That has proved vital over the past year, as several of the company's clients have taken longer to pay their bills. "We have a detailed cashflow model and forecast that we work out daily," says Lawrence. "Because we have that trusted relationship and the bank knows we've never exceeded our forecast, they always say 'yes' if we ask for a little extra cash for a limited time."

Gary White, corporate finance partner at CBHC Chartered Accountants, has seen hundreds of small firms tussle with banks. He agrees with Lawrence that working on developing a trusted relationship by being open with information is crucial in persuading banks to do your bidding when you need them most.

"Treat your bank as a major shareholder," he suggests. "Share your business plan with your bank manager and ask for their feedback so they understand what you are trying to achieve."

White reckons the key is drawing up a three-year business plan, but he adds: "So many SMEs are run by the guy who founded the company and they don't have a business plan. As a result, they can't give their bank manager the assurance they know what they're doing. Those business owners need to develop proper cashflow forecasts and be proactive in providing the bank with management information."

During the past few years, White has helped more than 100 SMEs prepare three-year business plans. "Generally, they have massively outperformed the companies that don't have a plan," he says.

There is a lot that SMEs can do to build better relationships. But nobody is pretending that all the faults are on one side. Shelton Fernando, who runs The Shelleys Hotel in Lewes, East Sussex, was furious when his bank charged him £16,000 because of late accounts.

 "My accountant had time off sick," explains Fernando. "When we have these sorts of problems, banks should show a little understanding. Banks are not helping small businesses to survive and when you ask them why they are doing it, they just come up with excuses."

But not all SME directors are angry about the banks. Mike Johnson, managing director of £1.8m-turnover PR company Johnson King, was delighted with the help he received from his bank when the company bought and refurbished its own offices. Previously, it had rented for 15 years. Not only did the bank advance a six-figure loan, it helped him through the complex process. King believes the reason he received the gold-star treatment was because he'd kept the bank in touch with the company's development.

"I call our bank manager once every three or four months and catch up on what we're doing: the kind of pressures we're under and that kind of thing," explains King. "It's a question of making a little time to do it. But there has to be genuine honesty. Often people don't tell banks the whole truth."

King admits relations with his bank weren't always so rosy. For years he had bank managers who didn't understand the business. Then the bank moved his account to a dedicated media industry team in central London. "That's when it turned around because they understand our business and have taken the trouble to find out about it," he says.

Behzad Saednejad, chief executive of £10m-turnover marketing agency Blackjack Promotions, says the key to a good banking relationship is finding a manager who is interested in your business. "If you have one who's not interested you're on a hiding to nothing," he argues. He admits that when you do find a good manager, it's important to work at the relationship. "We don't give the bank surprises," says Saednejad. "Banks hate surprises. When a bank forecloses, nine out of 10 times it's because they don't trust the information they've been given."

Steve Priddy, director of technical policy and research at the Association of Chartered Certified Accountants, says that accountants can help firms to build trusted relationship with banks. "When it comes to preparing and presenting cashflow and financial information, accountants are advocates for some SMEs," he says.

Advice network Business Link has also stepped in to help SMEs deal with banks. It has launched a regional financial intermediary service that aims to provide "intensive support" for small firms that find it difficult to secure finance. Such companies need to make their banks believe they have a future. "Inspire your bank account manager," says White. "If they share just an ounce of your enthusiasm, they are much more likely to support you and fight your corner."


There are three key areas where SMEs can improve their performance in finding finance and maintaining an open dialogue with their bank...

1. Securing a loan
Chris Quigley is one director who has managed to secure a loan from his bank. Quigley's company, £2m-turnover media group Team Rubber, has just raised £200,000—supported by the Enterprise Finance Guarantee scheme—to fund expansion, including opening a first overseas office in Washington DC. But Quigley, who founded the company with colleagues in 2001, admits that this was his toughest loan application yet. "We've had two previous rounds of funding and our bank was previously happy to let us have a loan without personal director guarantees." This time the bank demanded a charge over £50,000 on three directors' assets."

The application process was also demanding. "We had to provide a business plan for the next five years, and we had to justify our figures," says Quigley. "We had to map out the financial position over five years and align it with how the debt would be paid."

Quigley submitted the loan application in May, but it wasn't approved until October. "The decision process has been longer than previously, mainly because the internal decision-making in the bank has taken longer."

He says the bank has been a lot more rigorous in checking facts and figures. But the good relationship the firm has built with the bank over the years paid off.

2. Managing the cash
David Isom, managing director of V-SOL, a vehicle tracking company with a £1m turnover, is used to making impossible demands of his bank-and winning.

When Isom first started his business, he wanted a direct-debit facility for customers with a £1m indemnity limit. "Initially, the bank manager fell off his chair laughing," he recalls. But Isom persisted and found a sympathetic manager who listened and granted his new company the facility. "Most companies don't try hard enough to explain why they want what they're asking for," he argues.

A willingness to explain everything underscores Isom's ability to persuade banks to do his bidding, even when he's making tough demands. Because V-SOL is a small company dealing with corporates, Isom needs to show financial strength to gain their confidence.

He asked his bank for a loan so that he could deposit the cash and demonstrate a liquid balance sheet. "Initially, the manager told me the bank couldn't do that sort of thing. But when I explained why I wanted to do it, he talked me through a process that made it happen."

Isom has discovered another benefit of maintaining a good relationship with his bank. "They give us customer referrals. We've won tens of thousands of pounds of business from them."

3. Building bridges
Robin Burman, financial director of £15m-turnover marketing agency RPM, thought his bank manager simply didn't understand the "commercial realities" of his business. So he switched banks and forged strong ties with a manager who does.

"Because we have blue-chip clients for whom we may be working on projects worth anything from £100,000 to millions, our cashflow was lumpy," he explains. "In our early days, we had boom months and lean months."

Since then RPM has developed its services so that cashflow is more even, and found a bank manager with a keen interest in the business. "He interrogates our accounts every month and emails me questions," says Burman. "He understands our clients, our markets and enough about our business to make decisions."

Burman says his new manager does not push unwanted services. "He never tries to sell me something I don't need." To spread his risk, Burman opened a second account with another bank. "Within a month, the manager of that bank turned up with someone selling HR services. I closed the account."

How to keep the loan rangers on your side in a recession
Cash is limited during tough times. But if your business has delivered on its promises to your bank, then you have a right to expect favourable banking terms that are no worse than you've enjoyed in the past.

Yet David Molian, a lecturer at the Bettany Centre for Entrepreneurial Performance and Economics at Cranfield School of Management, says he's hearing "horror stories" of banks trying to load onerous terms on to good businesses with which they've had long-term relationships.

Molian says the first thing to look at when your bank offers you a deal is the cost. "If it's expensive today, think about what you might do to hit a milestone that would enable the bank to cut the lending rate or loosen the covenants in the deal," he suggests.

A common source of contention for SME directors is that they're asked for a charge over the family home. "If that's the case, ask the bank what milestones the company would need to hit to have that charge lifted," he says.

Should I stay or should I go?
You're not happy with your bank. Should you try to change it for the better, or leave? There are arguments for and against, says Bobby Lane, an SME adviser at accountants Shelley Stock Hutter. "On the one hand, it keeps banks on their toes so they remain competitive. On the other, as a small company, you may not be important to the bank so that it's not a big issue to them if you do go."

Before you move, consider two key issues. The first is cost. You need to work out whether charges at the new bank will be low enough to warrant the upheaval. But most important, says Lane, is to explore the nature of the relationship with your existing bank and what you would get from a new one. If you plan to switch, ask an adviser, such as your accountant, to make an introduction. "They may be able to introduce your firm at a higher level in the bank's hierarchy and pre-sell it to the bankers so they better understand your needs."

If you're a start-up, it's a good idea to shop around before opening an account. Some banks have free banking deals for new companies.