Banks and business risk – what’s 1x strategy to manage both?

The Banking Royal Commission has revealed ‘horror stories’ about banks.

While you may not have been directly impacted, there is no question that the financing sector and lending landscape is changing.

As business owners, obtaining and keeping finance for operations, capital improvements and growth is crucial. And in many cases, this is of increased importance in agriculture due to the seasonal and cyclic nature of the industry.

Therefore, as banking customers, we have to ask ourselves what the result of all of this scrutiny might be, and how it might affect us in future. A critical question is …

“Is it likely banks will become highly risk averse going forward”?

And if this occurs, how will it impact the customer – you and me?

Thinking business risk

Put yourself in the shoes of your bank manager or financier. If their directive is to reduce risk in their portfolio they may start asking you some difficult (or at least very searching) questions. They may want you to prove to them that your business presents a ‘good risk’ (or low risk) for them to continue to lend to or invest in.

If your business does not represent a ‘good risk’, you could be exposed to changes in your customer margin (your bank’s way of rating you), potentially leading to increased interest rates, or even not providing further lending to fund operational expenses, capital purchases or proposed growth plans.

And unfortunately (and in contrast to what many in the industry believe), businesses in agriculture are not immune to this scrutiny because their bank manager ‘gets it’ and understands the nature of the ups and downs of the industry.

For one thing, banks tighten their belts from the top down, via decisions at a corporate level, then filtered down to regional personnel. But also, bank managers are rotating in and out much more frequently these days. And as a result, long-standing relationships with a bank manager, who might ‘cut you some slack’ because they understand your business intimately, can no longer be relied on.

Improving or maximising your position with lenders

Consider these attributes of a business:

  • A business that has a structured and orderly plan (including short, medium and long-term goals).
  • The plan is backed up by strong financial data (i.e. budgets/forecasts looking forward, as well as an assessment of previous performance).
  • The business has a clear understanding and assessment of their risks, along with ways to manage risk (not just production risk, but business risks around finances, your people, the marketplace, suppliers and so on).
  • A range of effective management systems and processes (formal management meetings, quality management and human resource systems etc.), have been implemented and are followed.

A business with these attributes would be considered a much better risk to invest in than one without (obviously pending business performance and prospects).

One of the best ways to enable these vital attributes is to develop a structured, comprehensive and data driven Business Plan.

A Business Plan helps you:

  • Get clear on where your business is going (what’s the plan?)
  • Provide a robust strategy for how your business is going to engage with the marketplace
  • Create a clear plan around financial expectations and performance going forward
  • Understand the variety of business risks you could be exposed to, and ways to manage them
  • Provide details around how management of all of the above will be carried out, including what people, skills, systems and management will be required.

It is no secret that if you are proactive, and go to your bank with a clear plan and objectives for the business, up-to-date and forward looking financials, and considered and thoughtful assessment of your business risks, opportunities, as well as operational and management requirements, they are far more likely to be comfortable lending, or adjusting your customer margin in your favour.

In reality though, many businesses (particularly in agriculture) don’t have a formal plan with a clear direction mapped out, nor do they have comprehensive and routinely updated financials. Going forward, this approach may leave a business extremely exposed, particularly from a lending perspective.

Is your business prepared?

Looking for support in creating a clear plan for your business?

Our advisory team can help you to create a practical plan for the future of your business, and support you on the journey of change. Check out some of our business plan resources below, or request a free 30 minute consultation with an advisor today.


'The 5 Golden Rules To Creating a High-Performance Agri-Business'


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