How (Not) to Talk to Banks

The essence of presenting a loan application to the bank is where you will repay it from, i.e., where you generate cash flow. To answer this, you must ask yourself three key questions: Will anyone buy what I want to sell? How much will it cost? Do I have a plan on how to achieve this?

Banks strive, more or less, to understand what their clients want, but very often, at least according to personal experience, clients themselves do not know what they want and how to present what they want to someone who needs to lend them money. Many presentations of entrepreneurial initiatives, and I have insight into more than 3,500, ended with a loan denial due to an insufficiently thought-out idea (in the case of a long-term loan) or simply the non-existence of a need for a short-term loan. The essence of presenting a loan application to the bank is where you will repay that loan, i.e., where you generate cash flow.  In the case of short-term loans, this is most often from short-term assets, i.e., from receivables from customers. The bank can generally finance the receivables you have from your customers, or you can present a larger contract with a customer of good creditworthiness. A healthy level of short-term loans is 10 to 15 percent of business revenue. With long-term loans, most often, the company opens a new chapter in its business. Whether expanding production capacities or acquiring a new company.

When and Which Loan

While with a short-term loan the bank needs to understand, for example, a specific contract, with a long-term loan the bank must understand you, the vision of your company, the industry in which you operate, so it must have a clear strategic picture. And it does not matter whether the company is large or small, whether the bank finances a ‘pick-up’ for van delivery, a small family hotel on the Adriatic, or a new pharmaceutical factory. Essentially, it is a matter of trust that the existing management/ownership structure can achieve the planned goals, part of which is also the repayment of the loan. Long-term loans have a very strong impact on the economy as they support the raising of competencies of owners, management structures, and employees, long-term stability of business operations, and achieving the owners’ goals – increasing wealth. If you need to finance VAT as well, this should be emphasized to the bank as VAT will be treated as a separate loan that is repaid from other sources.

What Banks Look At

When short-term loans cannot be repaid from short-term receivables, they are refinanced with a long-term loan. We then talk about debt restructuring, and this transaction represents part of the financial restructuring of companies. Restructuring implies a significant change in the behavior of the company, i.e., strategic repositioning of the company in the market, change of ownership structure, change of business processes, and then financial restructuring. Companies that have successfully gone through the restructuring process have been marked by changes in ownership structure, changes in management structure, and fresh cash injected into the company. So, it does not mean just laying off part of the employees and seeking a long-term loan from the bank for the reprogramming of obligations or opening a pre-bankruptcy settlement. Restructuring implies much deeper changes. Unfortunately, there are no real restructurings in our country (or very few), so most pre-bankruptcy settlements will end in bankruptcy and liquidation of companies.  Regardless of whether you are a micro-enterprise, small, medium, or large company, an experienced banker can read a lot from financial reports and prepare quality questions for owners/management. The ‘curse’ of financial reports is that they reflect business decisions made in the previous period and in some way expose you to the interested public.