By Bernard Hickey
I recently talked with Steven Davey, Kiwibank's Manager of Product and Proposition for Business and Markets, about what a business owner could expect in their first conversation with their business banker.
He explained that's it's not just about how much any business could borrow against their family home, and that conversation was often a good chance for a business owner to start to better understand and improve their own business.
That first conversation would often take place in the owner's own business place.
"What we're looking for from a business person is a clear understanding of how they do their day job, how they create their business, and what their business does to generates the income to service the loan with the bank," Davey told me.
A business banker would often work closely with the business owner to understand their aims, their cashflows, their market position and how mature their business was.
For example, a start-up had different risks from an older business and often any loans or products could be matched to the maturity of that business.
"If you're a more mature business that's running quite well, it might be a case of the banker figuring out a different way of funding the payments in your business, or a different way of moving your payments around in your current loan structures to get a better interest rate structure, or moving it into a different product to save some interest," Davey said.
Some businesses do use their home loan to fund the business, but for others a shorter term loan may be more appropriate, particularly if it's for a fast-depreciating asset.
"Having a 25 year mortgage to pay off an asset that is depreciating may not be the best thing to do," he said.
It's helpful if a business owner has historical business records, including balance sheets and profit and loss statements for the last three years.
"A cashflow forecast prepared by an accountant is valuable if you are wanting to do something that will alter your business like add a new production line, expand into a new market or change your product mix. Otherwise if your business is in a “steady state” we will not really need a cashflow forecast," Davey told me in a later email.
A business plan is helpful, but not essential, he added.
"The way our managers are trained is to walk through a conversation about you and your business and that should discover most of your plans and needs," he said.
A business banker is also trained to assess the risk of lending to a business. "So anything that relates to mitigating risk is of interest to us."
That could include detail about valuations of buildings and information about leases.
"We will also need to know about anything that is really specific to your business, any specialised equipment you have, any environmental risks you have."
The longer term
That first conversation can also be about how to structure the business to make it more valuable when it comes time to exit, sell it, or pass it on. Davey said this was often a good opportunity to bring in an accountant to look at structuring estate planning.
Changing the way any loan is structured for an older business owner can make it more valuable for any eventual sale, he said.
"If you're 65 you're going to have a different loan structure so that you have nothing left behind when the business is finished. That can can improve your business valuation as well," he said.