THERE is a new reality in banking that businesses need to understand.
“The banks are definitely open for business, but they are being more diligent.”
That is how Razor Commercial Finance chief executive Paul Rowe sums up the current market conditions.
And he says businesses wanting to borrow from banks need to understand what is needed to achieve that outcome.
This new reality reflects a number of trends, notably the growing concentration of market power in a handful of banks.
The withdrawal of most foreign banks from the local market, and the takeover of others, has left the big four nationally operating banks – ANZ, Commonwealth, National and Westpac – more dominant than ever.
The Reserve Bank estimated late last year that the major banks accounted for about 86 per cent of the total value of business loans smaller than $2 million.
For larger loans, their market share was still large at 74 per cent.
A survey of Western Australian businesses by the Chamber of Commerce and Industry’s Small Enterprise Network found a similar concentration.
Its survey, also undertaken late last year, found that 83 per cent of respondents who had successfully obtained business finance in the previous 12 months received it from a major bank.
In the WA context, the major banks mean not just the ‘big four’ but also Commonwealth Bank subsidiary Bankwest, which has the largest number of business bankers in the state (see table).
The SEN survey also found substantial dissatisfaction with the level of competition in the banking industry.
In all, 44 per cent of respondents who had applied for loans were ‘dissatisfied’ or ‘very dissatisfied’ while only 20 per cent were ‘satisfied’ or ‘very satisfied’.
The gripes included the amount of time taken to complete the process and the administrative burden of completing the application.
Businesses that are unhappy with their banks have limited options, and the tip from business advisers is: learn what the banks need and play by their rules.
Grant Thornton Australia partner
Bill Shaw emphasises the importance of preparation.
“Businesses need to understand their plans for the next three years, understand their growth strategy, and understand their funding strategy,” Mr Shaw told WA Business News.
“They need to know what is needed to fund their working capital and their assets.
“Then they are in a position to talk about financing.”
He encourages businesses to focus on building a relationship with their bank, but admits that doesn’t always deliver a positive result.
“Ideally the first choice is the bank that you have a relationship with. If they know you, they are more likely to lend, but it doesn’t always work out that way,” Mr Shaw said.
PwC partner Billy Meston said his clients could become frustrated with their banks.
“They continue to find it a challenge to educate banks on the value of their business. My clients say their banks don’t really understand what they are doing,” he said.
Another big hassle for his clients is the lack of continuity among the banks’ relationship managers; every time a new manager is appointed they need to be educated about the business and how it operates.
Mr Meston advises his business clients to align their financial information with their bank’s needs.
“They need to present financial information in a manner the banks can understand and measure,” Mr Meston said.
“That means aligning their financial information to show the (performance) metrics the banks are looking for.
“A lot of my role is to help clients present the information in a format that suits the banks.”
Mr Meston said this process needed to apply to more than loan applications.
It should also apply to monthly or quarterly reports, to help the bank stay abreast of the business and its financial performance.
The reality, he said, was that more management time was likely to be involved in dealing with banks.
Razor’s Mr Rowe said finance brokers who did their job properly could help both borrowers and banks.
“The broker should be vetting the deal before it gets to the bank,” he said.
“They can advise their client to use a different structure, or provide better security, or borrow less.
“That process is actually helping the bank to filter the loan applications.”
Mr Rowe said finance brokers could also assist businesses in putting together lending submissions in the same format the banks used, including supporting documentation such as financial statements and cash-flow information.
He believes one of the advantages of using a broker is the access they have to a wider suite of products.
And brokers can also help clients understand the pricing structures used by different banks, including items like line fees, interest margins and treasury margins which vary from bank to bank.
However Mr Rowe emphasises that businesses should also focus on building close relationships with their banks.
“Nobody owns the client; they have ownership of the relationship,” Mr Rowe said.
“As far as I’m concerned, it should be a dual relationship.”
He encourages clients to build a close relationship with a good bank manager, who will be able to assist the business. As such, Mr Rowe challenges the common advice from brokers who encourage clients to spread their banking relationships across multiple lenders.
He recommends having links with two banks as prudent risk management, no matter how close a business is to their local manager.
That is because banks can change their national lending policies without regard to the conditions in particular states.
Looking at recent trends in lending, Mr Rowe said the banks generally had not imposed new conditions on their loans, but are applying terms and conditions much more strictly.
“All conditions are being watched to the letter. They haven’t been exercised in the past to the level they are now,” he said.
