Review of the main issues
Although thousands of books have already been written on this subject, let's try to go over it again.
No doubt Banking and Business They have one element in common: the transactional movement, in both directions, of the monetary mass.
The relationship between the two is supported by a wide range of products and services, but there is no doubt that financing plays a predominant role, and especially for the figure of the CFO, For whom it is of special importance to know if the bank will grant you the financing you need, either to undertake a new project or for the proper day-to-day functioning of the company you work for.
In this sense, the CFO takes on the role of MEDIATOR, between the pressure/rush to which the businessman or his Board of Directors subjects him and the support that the Financial Entity can give him GRANT OR NOT, through financing. Therefore, for the CFO It is vital not to have to resort to plucking the daisy's leaves, but to try to ensure a positive response.
If you allow me the simile, I always say that the figure of the CFO, When you interact with a Bank to obtain financing, it is like when you are young and had to convince a person to go out with a friend, resorting to all kinds of arguments. Obviously, things got quite complicated when the friend was not very good-looking or, on the contrary, it was simplified when he was more attractive.
Let's start from a basic premise: any financing proposal that we make to a Financial entity, it supposes ALWAYS ALWAYS ALWAYS, an operation of RISK, and to be granted the risk must be reduced to its minimum expression since each approved operation must respond:
- Faced with strong (and necessary) regulations imposed by the European Central Bank and the Bank of Spain.
- Before the Bank's shareholders, and before its depositors.
- And of course, before the figure of the Bank that will scrupulously study our proposal, and will approve it (or at least will make a favorable report on it to its superior), or deny it: THE RISK ANALYST.
Get the YEAH, It involves the fulfillment of 2 RESPONSIVE AND CONTINUOUS milestones, as we will see later:
- Demonstrate payment capacity
- Risk minimization.
However, the above and despite the capital that I have described it, sometimes the CFO, The YES has it in advance without even having to go out into the street to look for financing. Let me explain: today, powerful information systems and the existence of specialized companies that sell very elaborate reports, allow Banks pre-classify companies (giving them a higher or lower credit score) and even pre-grant them financing limits, with a significant number of commercial managers contacting the Financial Directors. But of course... Which companies do they target? Continuing with the previous simile: those that are most “attractive”.
Therefore, on many occasions, the Financial Director does not even have to pluck any daisies, but rather:
- Serve the different Bank salespeople, who bring you financing “at home”.
- And (since everyone will surely propose similar amounts of financing), analyze who gives you the best financial conditions for said operation.
But it is true that on other occasions (especially if the credit score score that I mentioned above is not one of the best) as a Financial Director I will have to do street work, reflecting on several issues:
Putting myself in the Bank's place: will it give me what I need?
The best way to anticipate the Bank's response to my proposal is to INTERIORIZE the question: “If I were the one who had to lend out of my own pocket, to my company, would I do it?”
As a Financial Director, most of the time, protected by the deep knowledge I have of the situation of my company (with that SWOT analysis that I do mentally and almost daily), they allow me to answer the previous question, almost immediately.
Therefore, when I have to “go out” to look for financing, I will do so when I am FULLY CONVINCED that:
- The current situation of my company generates sufficient payment capacity.
- I have very proven the viability of the project I intend to tackle.
- Financing is responsibly assuming a payment commitment.
The financial statements presented to the Financial entity, They must be able to demonstrate to the commercial manager and, above all and especially to the risk analyst, that the return of the capital that the Entity grants me + interest + expenses must be attended to through the generation of net cash flows.
It is important to emphasize in this sense that those net cash flows must come from our primary revenue generation (our usual activity). If I have a rent a car company, my main source of income is car rental, if from time to time I sell a car from my car fleet, I will include it in my account Results, but not between said net flows.
Furthermore, there is a one-to-one correspondence between payment commitment and financing time horizon. It's very important set an appropriate time horizon, in accordance with the amortization period of the cash that I intend to finance. I cannot hope to convince the Bank to finance me with a long-term loan, a stock of clothing that I must sell this season, or finance with a vehicle for my company for 15 years. Or on the contrary, intend to finance an asset with a credit policy that will be renewed (or not) annually.
In addition, request a line of credit for financing working capital, and having it available in its entirety practically all year round, without there being periodic cash receipts from the income from our main activity, is a clear warning sign so that, when it expires after one year, the Bank does not renew it for me
Of course: the guarantees provided are NEVER a substitute for my net cash flows and therefore do not prove the payment commitment. Please, let's ignore the typical comment: “How can you not give credit to my painting company, if I have 5 stores and 10 parking spaces?”
Adjust to my needs
The amount requested must adjust to what we really need. What's more, let's not get our hopes up: we have to assume that the Financial Entity will rarely grant us the 100%, not on a mere whim, but as we have commented, based on the regulations of the European Central Bank and the Bank of Spain on minimizing the risk, and this is achieved by forcing the company to contribute its own resources to the project in question. (In truth, there are many occasions in which a Financial Director requests financing from the Bank's commercial manager strictly arguing the viability of a project, and that he throws his hands up when he and the company are asked how much they are putting into the project. ).
It is true that although we always have to contribute our own resources, there is a range of amounts to contribute, and the cards that we can show, in addition to our Financial Statements, are:
- Our client portfolio.
- That the management team has experience, training, etc.
- If applicable, financial contribution from the partners themselves.
Remember we can never come empty-handed.
Be very clear about what I want the financing for.
It is very obvious, but not uncommon: under no circumstances when asked about the Financial entity Why do you need the money, the answer is “so that my company grows”, because the Bank is going to ask us HOW, IN WHAT WAY, IN WHAT PHASES, And if we are not perfectly capable of answering them with a solid project, with a proforma invoice, with a contract with a supplier, etc., it is better not to even consider it.
What's more, even though we have all of the above, the Banks They can approve an investment project conditional on meeting milestones; if these are not met, we will no longer have money to complete the project.
Improvisation: our worst enemy
As Financial Directors, We have to be aware that the response to our request for financing will almost never be immediate, and will require that we do it with sufficient advance notice and, above all, be calm. The wide and varied documentation that the Bank is going to ask of us (I insist due to regulations, not out of whim) is generally not obtained in a day, or even in a week. What's more, as the risk analyst deepens his study of the operation, he may request more documentation than we initially thought was necessary. Likewise, depending on the operation, the decision may transcend the analyst's scope of decision and be finalized by elevating it to another higher body.
The title and content of this article aims to:
- On the one hand, it highlights the reality that the Financial Director faces when going to the Bank to request financing, with a certain “stage fright” when explaining his demand or need.
- On the other hand, put on the table the existence of different parameters that will allow us to know if I am close to getting a positive or negative answer to my question, hence the leaf removal.
In it next blog, I will continue with the content on which we have advanced in this, and I will begin it with the sixth reflection: our request must be based on a Viable Business Plan and well structured.
If you are interested you can find information about our Master in Financial Management, Accounting and Management Control or the Master in Financial Management and Functional Consulting SAP S/4HANA Finance.