“I have a great relationship with my bank – they’re always pleased to see me and they’ve never let me down.”
That’s what an acquintance told me a while back when we were discussing how business was going. He seemed to believe that he had an open line of credit and that if anything went wrong, the bank would bail him out. And he was quite comfortable with that.
It seemed to me that he had probably taken advantage of this service quite liberally in the past, although I didn’t ask….!
But he should not have been so cavalier.
Borrowing from the bank should only be done with utmost caution, because when you take the bank’s money, you give them an element of control over your business.
Many companies seem to forget this essential part of the equation, but they need look no further than Carillion to see the potential consequences. The company – which in reality was living on borrowed time for months – finally collapsed when the Royal Bank of Scotland pulled the plug on it, tightening the terms of its funding and refusing to lend the business any more money.
According to one commentator, Carillion had been ‘living’ with the Grim Reaper standing silently in the corner of its board room for a good few months. That Grim Reaper was the banks it had borrowed from, who could ‘call time’ at any time.
I’ve seen too many businesses put themselves in the same position by borrowing, often without truly understanding the implications.
Banks are there to make money for themselves. They will lend to you only if they think you are a risk worth taking…
… and if they get it wrong and you lose their money, they can come after you.
As I’ve written before, it’s essential to build a good relationship with your bank manager, who can in many cases be extremely helpful to you. But don’t think that this means that they’ll allow you to borrow money recklessly or indefinitely.
Of course, few business owners think they’re doing that when they borrow. They usually think of it as a short-term solution, or as money that is in some way ‘owed’ to them (after all, it’s their bank…).
But life and business doesn’t always turn out as expected, and it’s a brave business owner who thinks he or she will never get it wrong.
If your fortunes do take a turn for the worse, you must expect the bank to raise the drawbridge.
And if you owe it money, expect it to come a-knocking.
The solution? If you have to borrow, make sure you come to the bank with a well-thought-out plan to repay the money – for your sake as well as the bank’s. (Ironically, showing the bank that you have a solid plan will make it more likely they’ll lend you more….)
And then put your energy into managing your money professionally and wisely, so that the only reason for you to borrow is to fund growth – not to cover shortfalls, lack of profitability and poor financial management.
If that’s something you’d like help with just get in touch.
