I get the feeling that few of us are comfortable with our banking relationship. The response to the previous 2 weeks emails has been pretty conclusive - especially last weeks story from Gary that evoked a storm of protest. And [co-incidentally, I'm sure] almost all the banking subscribers to this weekly idea decided to un-subscribe - maybe burying their heads in the sand?

I sat in on 2 consultations this past week in which banks were abusing their power - so this week I'd like to look at one of the most common areas of stress and misunderstanding.

Woods & Trees
As we go into any relationship we tend to enter it with eyes fairly wide open. [Unless, of course, these are the only people prepared to lend us money - in which case we would happily close our eyes and dance with the devil!] So we define the bases clearly - and we're cautious for a period. As the relationship develops we tend to be less discerning and over time we get so close that we no longer see the wood for the trees. We're simply in too deep to gain any perspective.

If you're getting emotional over your own banks treatment of you - then this is where you are right now. This week I'd like to share with you a method of quickly gaining perspective.

Your bank is in business to make a profit. Like you. The difference lies in the products and service you each offer. Your bank sells money for a living. And your banks goal is to sell as much money as it can, for the highest profit it can. Your bank is not a charity. [Hell, even Shakespeare knew that!] Your bank does not exist to advise you. [It may offer advice as a peripheral service - but it's amazing how often that advice leads to them selling you some money.]

Your bank has a simple goal - to optimise the profit it makes out of your relationship. In fact, it gets a little worse than that. In reality, your banks goal is to optimise the profit it makes out of you this year. You may notice that this conflicts somewhat with your goal of building a banking relationship over a longer term.

Leverage
Any abusive relationship depends on leverage. Usually that leverage goes to the most 'powerful' in the relationship - the parent; the teacher; the person with the gun.

In the case of your relationship with your bank that leverage is dependent on the amount they have lent you; the way they have structured the loan; and the amount of security they hold to secure that lending. For example, if you have an overdraft [which can be recalled on demand], and your bank holds everything you possess as security [your home; your policies; your savings; and your children] then the chances are strong that you're going to be abused at some time. [Usually when your current 'relationship manager' gets arbitrarily replaced by his mother-in-law.]

Compliance
The catalyst for the abuse is usually some event or other. Something happens in your business; your bank manager changes; your relationship manager changes; a big player in your industry changes and sends ripples through the banks; etc. Most of these events will not be your fault.

The challenge is for your banker to make you feel that it your fault and to always keep you on the wrong foot. As a result you won't think straight and chances are you will behave the way he expects.

Let me give you an example. Last week I met with a business owner who was encountering some bank pressure. In fact, he was spending 3 hours per week trying to comply with the banks wishes. After an hour together we established that his company [the bank had complicated this structure somewhat] had offered R3.75 million rands worth of security to secure R755,000 of facilities. And they were giving him stick!

We're usually so close to the action that we don't see how ludicrous this is. Security The bank asks for many forms of security - so lets have a look at the most common of these.

Personal Surety
I won't go into too much depth about how bad this 'blank cheque' is, as I do that in huge depth in the CrashProof your Business seminar and many of you [readers] have already attended that. Suffice to say that this is the single biggest cause of loss when a business stumbles and the business owner is faced with losing all his personal assets.

This is probably also the main cause of the bank having such abusive leverage over us. Yes, it is possible to borrow money for your business without sureties; and it is possible to get them back or to nullify them - but it takes a few hours to explain how in a way that will make you do it.

Fixed Property
This probably the most common form of security that the bank will ask for before it lends your business any money. They will register a covering bond over the property to allow them to extract money when you sell it, and to allow them to sell it for you if they want their money back in a hurry. Irrespective of the true value of your home the bank has no obligation to raise anywhere near that value. It's only responsibility is to raise enough to cover your debt - and as you will see from Gary's story - they don't take even that responsibility very seriously.

Your Personal Policies
The next most common form of security is your cession of personal policies to the bank. You complete a simple form and deliver the policies to the bank and they lend you money. Oh, if only it were so simple! In essence you have transferred ownership of those policies - which means the bank can do with them what they wish. Over the past few years I have dealt with: - policies the bank lost and which cost blood to resolve [it seems to happen when banks merge :-)] - policies the bank simply held onto, years after the debts had been settled - policies the bank cashed in, despite the business owners ability to repay the debt - policies that the bank swallowed when the business owner died The bank is usually lending your business money against the surrender value of the policy. Over time this value increases, but your borrowing ability never seems to keep pace with this growth.

Cash
Cash comes in many forms - not just Reserve Bank cheques :-) It's often concealed as a fixed deposit account, or a savings account, or a retrenchment package, etc. Your bankers ultimate goal is for you to give him 150% cash security [with him paying you 5%] so that you can borrow 66% of your own money back [with you paying him 17% (because your business is so risky)], and allowing him to lend the rest of your money to really risky JSE listed institutions like MacMed! And, yes, I have seen this scenario often over the past 5 years.

Cession of Book Debts
Next level of security is a cession of book debts. Simply put, you cede each invoice you generate to your banker. If anything goes wrong, this allows the banker to collect all the debts and use the proceeds to pay off your debt to him - without worrying about any of the other parties. Somewhat more sinisterly, this cession means that you have to put all income from invoices into this bankers particular account. Effectively this hobbles you when you want to set up alternative banking relationships.

Cession of Loan Accounts
Many of us have invested our own money into our businesses. We do this by injecting capital [a nice way of saying we give the damn beast our own cash when it runs short], or by not withdrawing our salaries or profits or dividends. This usually means that we have a huge amount of ourselves invested in our firms. Your bank takes a cession of your loan accounts in the business to prevent you from taking your own money out as long as they're lending you money. Part of me understands why they would do this, and part of me objects vehemently. After all, who is the person generating all this money - you! And it seems that everyone wants to protect his interest in you - but doesn't want to protect you yourself. What to do Now Here's an exercise for you to do when you next feel some bank pressure - or maybe later today if you want to feel better about your business.

Assess your Security
Each year your bank sends you a list of all the security they hold to secure your borrowings from them. Use that list as a starting point. Calculate the true value for each item on that list.

Fixed Property
This is a fairly subjective issue, but why not get an estate agent to give you an idea of a value if you wanted to make a quick sale. Since you already know the balance on your mortgage bond the calculation is simply: Probable Sale Price - Outstanding Mortgage Bond = True Value of Home

Your Personal Policies
Ask your broker to prepare a statement of all of your policies, listing all their values. This usually includes the surrender value of each policy. This same list should also show you which policies are ceded. [You might want to reconcile this list with the list the bank has given you. I have found dozens of situations where a policy ceded ages ago is still unnecessarily ceded!] Simply add up the surrender values of all the policies ceded to this particular bank to establish the value of this form of security that they are holding.

Cash
Add up the value of any fixed deposits; notice deposits; savings accounts that are securing this facility Total Hard Security Now total the previous figures. This is the 'cash' security that the bank holds to secure their loan to you. In my experience, more than 90% of all of us are borrowing much less than this total figure. Which means the bank is not in much danger of default! As a matter of interest - if their loan to you is fully secured why are they charging you an interest rate that is worse than prime overdraft rate? Surely, if they are running no risks, they should be charging you the same interest rate they offer to safe listed firms - MacMed springs to mind?

Cession of Book Debts
Book debts [the money the business is owed] isn't quite cash, although it can be quickly converted. the bank takes an awfully pessimistic view of this form of security - but if you were to personally collect this money - how much could you rely on getting? Add this figure to the previous total - and this is the figure the bank can realistically lay claim to in the event of your firm not paying them.

Cession of Loan Accounts
Your loan account in your own business is not a hard asset because it can't be quickly converted to cash - but it does represent your investment [money, sweat equity, tears]. Calculate how much money your firm owes you and the other directors.

In Balance
A simple question - are the figures balanced in any way? Are you indebted to your bank, or are they indebted to you? And with this figure - who is the client? My experience has been that the figures almost overwhelmingly favour your bank.

If this is the case, we do we put up with the arrogant levels of shocking service that they dish out? Why are we afraid of little people who have never had to worry about putting food on this weeks table? Why do we allow ourselves [and by extension our families and employees and clients] to be pushed around by clerks who live in terror of losing their jobs. Why are we so timid?

Judge Ziglar wrote a book some time ago "Timid salesmen have skinny kids" . So do timid business owners. If you have the courage to take on the world by running your own independent ship - you are my hero. You inspire me. Please get on with it.

Conclusion
Go get 'em Tiger - You are the captain of your own ship; the creator of your own destiny. Don't be sideswiped by petty little people who seek only to profit from your efforts. Sweep them aside in your wash and seize the day.

© Peter Carruthers, www.petesweekly.co.za

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