To conduct a successful bank negotiation, we must be aware of our company’s financial problems, knowing that sometimes high sales volume doesn’t necessarily mean our company is doing well. Issues such as poor financial planning, expense austerity, inefficient management control, etc., can be masked.
The bank is a necessary provider, sometimes becoming a strategic PARTNER, but always seeking ITS OWN ECONOMIC BENEFIT, just like us.
Let’s never forget the following:
- Both the company and the bank must benefit from the relationship.
- The relationship is based on trust management.
- It’s a love-hate relationship.
- The bank is an ally from a commercial point of view. We must avoid noise.
- The relationship consolidates over time, but we tend to neglect it.
- The indicator of the relationship’s health is the BANK NEGOTIATION
The bank is interested in two types of analysis to identify our company’s payment capacity:
- The evolution experienced in:
- Solvency
- Sustained growth
- Working Capital
- Debt
- They will evaluate sensitivity or tension in different scenarios and risks, working on different business variables, such as:
- Sales
- Interest rates
- Changes in average collection and payment periods
- Commercial insolvencies
- Expected market margins
- Investment needs
- Variation in operating stock
Let’s look at some key aspects we should consider about our company’s information to achieve success in a bank negotiation.
Financial statements
The bank will ask for our financial statements to analyze our payment capacity.
Conducting audits of our company, even if not necessary, conveys trust, because anything that doesn’t appear in the annual accounts won’t exist for the bank.
To negotiate with the bank, it’s important to present a forecast of the financial statements mid-year, aiming to convey control.
Undoubtedly, the annual report is one of the most important documents for the bank’s analysis. We must prepare it in detail to defend it in the negotiation, as the bank will seek consistency with daily operations.
Asset analysis
The objective of analyzing the company’s assets is to track payment capacity. For this, the bank will evaluate our:
- Financial independence (regarding banks, customers, suppliers)
- Capitalization (self-financing)
- Destination of financing (what is financed, how, and how much corresponds to our Equity)
- They will review the company’s latest balance sheet and the ratios that can be obtained from it.
Economic analysis
They will analyze trends in:
- Sales figures and by products
- Global gross margin and by products
- Evolution of structure expenses
They will review the Working Capital:
- Apparent Working Capital: Calculated from the latest balance sheet
AWC = Current Assets – Current Liabilities
AWC = Permanent Capital – Fixed Assets
The apparent working capital is the part of permanent resources that doesn’t finance non-current assets.
- Necessary Working Capital: calculated based on the cash budget of ordinary activities. It’s what the company really needs to finance its operations, net investments in current operations once the financing generated by the operations themselves is deducted. It’s calculated using the company’s average maturity period (time elapsed between payment to suppliers for inventory purchases and collection of sales from customers).
It’s essential to know our company’s NWC because when the business grows, the NWC will also grow, and we must plan how to finance it.
The Bank expects the company to finance part of the growth, as we must repay the financing the bank lends us.
The risk is financing working capital needs with short-term financing.
If APPARENT WC < NECESSARY WC, it’s because we have a deficit of permanent capital, and the bank will review how the company is being financed. If the difference increases, the client will have less and less payment capacity to finance itself.
Key Ideas
- RISK: It’s the most determining factor for the bank. If we don’t have payment capacity, the operation’s risk will be high, so they won’t grant us financing.
- CANDIDACY: No matter how profitable a client may be, if there’s no repayment term for the loaned money or doubts about their ability to repay it, they will distrust the client. We must convince them that we are a solvent candidate.
- TRUST: Key factor in commercial relationships and even more so in the financial sector. The Bank’s objective, if it trusts us, is to ensure that we get into debt to the maximum of our capacity. The Company’s objective is to constantly generate trust.
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