How NOT to deal with your banker

Newsletter #3. Exciting day!

For those that have not seen it yet, I now officially launched my own business! I wrote about it on Twitter:

I’m super excited about what’s to come- so thank you again for following along! 🌷

As I’m transitioning out of banking, I felt like it would be a good time to share how NOT to deal with your banker.

Reason being: every farmer or business owner I know has a strong opinion about this.

And more often than not, it’s not positive: “necessary evil”, “wasting time”, “don’t understand my business”.

But having been on both sides of these conversations, I also know there’s a lot of miscommunication going on.

So this week I want to share one extremely valuable lessons I learned from banking: understanding incentives.

Incentives

Everyone has their own “North Star” (remember last week’s newsletter), and we act in a way that reflects this.

So if we want to get something done, like lending money, we must understand what the other person actually wants.

Here’s an overview of what different stakeholders of your farm or business care about:

• Shareholders: interested in dividends and stock price; take a medium to long-term view

• Lenders: interested in future liquidity and cash flow available to sustain the servicing of all financial obligations (interest and principal)

• Suppliers and Creditors: look at the short-term liquidity to judge the ability to pay invoices

• Governments and Authorities: focus on the proper tax calculations and governance

• Management: judge the effectiveness of the policies as measured through ROI/ROCE/ROIC and other similar ratios

Charlie Munger, the billionaire business partner of Warren Buffett, knows that incentives are what drive us all…

Real example

I was the lead analyst for major clients like Volkswagen and Coca-Cola, but also covered dozens of smaller businesses all over Europe and the UK.

One of these smaller businesses was in the UK and was involved in manufacturing. They made heavy losses in Covid when demand dropped, and struggled to recover from it.

This is unfortunate in itself. But what made it worse was that they never communicated it with us in the right way.

They thought we wanted to see how a “quick magical turnaround” was going to make everything alright. But this was more aligned with Shareholders, not Lenders.

Now every quarter they shared the same forecast with us, adjusted for the “new losses”. Their Budget vs Actual was consistently off.

And that cost them– because without the right communication, we were not confident to give them more facilities, offer other products and expand our relationship with them.

What we wanted to see was:

• Them stabilising their operating income (which repays debt), not a magical boost in profits (which repays shareholders)

• Stabilising demand and their plan to fulfil this, not a sudden recovery

• Them achieving (low) targets, not failing high targets

Takeaway

So, the simplest way to make your banker happy is this:

Give them a realistic (even conservative) forecast of your business’ cash generation over the length of your loan.

Show them that, even in adverse scenarios, you can repay the debt, and they will have a much easier case getting your requests approved.

But we can’t lie tie ourselves. Taking on too much debt is how good businesses die.

So don’t hesitate to speak with a professional to figure out how much debt works for you.

And a final note: don’t think logic will trump incentives…

Hope you got something out of this!

If so, or if you have any other specific questions, do not hesitate to let me know!

Till next week! 🌷

Best,

Joey