Paving The Way For Healthy Credit Relationships
Over the last few years the corporate banking market has witnessed a power shift away from finance providers towards the buyers of banking services. Lower interest rates and reduced M&A activity have allowed most corporates to repair balance sheets and refinance effectively. The rise of alternative sources of traditional bank finance has allowed corporates to pick and choose which provider to deal with, and on what terms, as competition drives down prices and weakens terms and conditions, such as covenants.
Given the available choice, this leaves treasurers and cfos with a critical decision to make. What bank or finance provider should a corporate choose? Although this may not seem to be a priority decision in the good times, making the right choice here may be critical to the future survival of the business. Treasurers may not know what it is that they want from a banking relationship and banking group, but the criteria below should help them reach the right decision.
The importance of price in a banking relationship cannot be overstated and this must be a consideration not just of the absolute level of fees, but also the added service fees, compulsory tie-ins and some perception of value-for-money. But are the fees commensurate with services offered and should you really be paying for the added services?
Many of the extra services finance providers encourage corporates to take may not provide value for money themselves, and some of the services may be essential to the smooth running of the business, such as the clearing of cash. Severe disruptions may occur if relationships are changed – but do the benefits of such a change outweigh the costs?
It may be that a bank’s other offerings are more important than fees. A good relationship can build market knowledge and awareness and allow access to good ideas and some extra facilities such as hedging and acquisition support. The concept of a universal banking provider and the importance of a proactive advisor must be assessed in the context of the needs of the business – a question to consider though is will the services they offer help your business succeed?
Even if a bank purports to offer services, its ability to deliver will be critical to the success of a banking relationship. While there are no certainties in life, and certainly none in business, past experience of similar currencies, instruments and markets can be a useful guide. League Tables will tell you who has been active in certain areas – but is the most active always the best choice for you?
Even if a bank has not previously been active in particular markets or industries, the important point is that they understand your needs and objectives. An understanding of local needs, and local access to facilities, be it in a multinational or a local context, can help businesses avoid liquidity problems and ease the smooth running of a treasury operation. What bank or finance provider best fits your needs?
As well as fitting your needs, banks are crucial providers of support in troubled times. Their response can often make the difference between success and failure of a venture or an entire business. It may be wise to reward past support, or to engender future support through continued patronage, but will that support be needed or provided if required?
Support in troubled times is much more likely to be given if there is a good personal relationship between the finance provider and the corporate. Personal understanding fosters a healthy relationship and exchange of ideas – and it is far easier for a bank to close credit lines on someone they do not wish to remain in contact with. Can you work well with the team of people at a particular finance provider?
Once a treasurer has satisfied himself as to the desirable characteristics for his banking providers, he must then decide which party or parties best meet those criteria. Commonly treasurers will seek to maintain various relationships, but deciding on the number of relationships is again a difficult decision.
The choice of number of relationships may be seen as a balance or trade-off. Fewer relationships allow for deeper focus to those that exist, but will this limit available sources of capital, and negate some of the advantages of the current buyer’s market?
Changing finance providers may result in lower costs or improved efficiency in the short to medium term, but will this reduce the likelihood of long-term support in troubled times? Finance providers are notorious for being selective about who they take their best ideas to. Only those clients who offer them significant investments of time and business are likely to be rewarded with the most innovative ideas. Is this a suitable investment for your business, or are these great ideas less important than other relationships?
Similarly, if you do not make the investment in a relationship with a finance provider, it is unlikely they will make the investment in the relationship with you, and the quality of service may suffer. Banks are interested in growing profitable accounts, and much of the profit comes from ancillary services, for which your demand is limited. Which relationships deserve these profitable ancillary services, and how many can your business support?
The determinants of size of banking group will vary according to the perceived needs of the business, and no one answer is applicable to all corporates, or even at all times. Similarly, the desired characteristics of a banking relationship will vary between corporates and will change over the life cycle of a business. Fundamentally, the correct banking relationship and size of banking group depends on what you want from those relationships, be it access to capital, added value services, ongoing support or some combination of all three.