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How SMEs can build better relationships with banks during the economic downturn

The COVID-19 pandemic has put many small-to-medium enterprises (SMEs) under unprecedented pressures, forcing many to defer loan repayments and seek funding support, while grappling with severely diminished cash flows. Here are some strategies to more effectively engage with banks and other lending institutions. 

Gary Anders | June 2020

Australia’s accounting sector has been caught squarely in the middle of the coronavirus crisis, as countless thousands of businesses seek professional advice to try and understand the various government and financial assistance measures currently available, and prepare new loan applications.

CPA Australia is playing an integral role in assisting its members and, where possible, working to resolve roadblocks on behalf of their clients, including problems around businesses accessing JobKeeper payments.

“Australian banks have typically done a good job in their communication to SMEs over their ability to seek loan repayment deferrals and access to finance,” says CPA Australia’s manager business and investment policy, Gavan Ord.

“But that’s obviously not the case in all situations, and we do hear stories from members around issues some of their clients are having with lenders.”

Where such issues have broad impact, CPA Australia has directed many member concerns to the Australian Banking Association (ABA), as both organisations work together to identify and resolve funding issues for SMEs.

“We’re working with the ABA to identify and address systemic issues with SME’s access to finance, especially where members are directly affected,” Ord says.

How accountants can smoothen the process

Joe Formichella, head of small business banking at Bendigo Bank – Australia’s fifth-largest retail bank – says the role of accountants in assisting SMEs to access finance can’t be underestimated.

“Ideally, we want business customers to connect with their accountant very early on to let them know they’re looking to borrow money,” Formichella says.

“We would hope the business customer and accountant would [conduct] due diligence around the purpose of the loan, the business’s ability to service that loan, and what additional time they’ll need to be able to repay the additional debt.”

In the current downturn, most applications pertain to keeping a business funded and supplied until economic conditions improve.

Formichella says the most appropriate loan products for a business customer – whether it be bridging finance, a line of credit, or for other borrowing needs – are discussed at the time the customer meets with the bank’s relationship manager.

“It really depends on the customer’s needs. Every customer and every business are different, so it depends on the life cycle and maturity of the business when they come to a bank.

“But it’s important to come prepared with a business case and plan detailing the [loan’s] purpose. It needs to make sense for the business, and for any additional funding to deliver a net benefit to the business.”

Preparation of key financials

Formichella emphasises that lenders first need to ensure a business is viable, which requires understanding its financial performance history to identify a trend. 

Generally, this requires providing two-to-three years of financials, including the applicant’s current balance sheet, profit and loss, and cash flow statements. Newer applications may need to include more up-to-date financials to demonstrate a continual performance trend.

“That gives us a good idea of the ability of the customer to continue to generate a level of financial performance to support existing debt or additional debt,” he says. 

“It also gives us an idea of the quality of management and their performance – the decisions they have made to continue to improve their business and returns.

“Then, we’re looking for at least 12-month projections on what the future state of the business [will] look like to ensure [any] additional debt can be serviced, over and above existing commitments.

“We do take all of those factors into consideration, [but] there also has to be a level of compassion and a genuine need to support our customers through this cycle.”

Looming cash flow crunch?

Formichella reveals that Bendigo Bank conducted an intensive business customer calling program through March 2020 to try to better understand the impact the current crisis is having on businesses’ operations.

“There is quite a bit of frustration and stress out there at the moment,” Formichella acknowledges. “It’s quite stressful for small businesses – the fact that the impact on their business is not of their own doing.”

CPA Australia’s Ord recognises that the spike in loan and tax payment deferrals by businesses, together with the surge in applications for JobKeeper, does present a looming problem, as most assistance measures are only in place until September this year.

“Are we setting ourselves up for a potential cash flow crunch in late September?” he asks. “And how are businesses, banks, and governments going to mitigate the risks of that cash flow crunch?”

Ord advises that businesses should begin considering whether they will be able to meet all their cash flow requirements, including deferred loan repayments, come late September, and if possible, start to take action to help them through that impending crunch period.

Access all of CPA Australia’s COVID-19 resources in our dedicated content hub.