There may be a tendency by some small business people not to pay adequate attention to the quality of their relationship with regulatory authorities such the department of taxes or environmental management agencies. These are just two examples of the many regulatory bodies that affect the way people do business. What is usually not realised that poor relationships with regulatory bodies will indirectly affect a business’s creditworthiness. No banker will hazard giving you loan when they know that you flouting the tax laws or environmental regulations. The regulatory agencies have the authority to force to close shop. This can happen soon after you have drawn down on a bank facility and in such case chances of you repaying the loan on due date are slim.
To ensure the long term sustainability of your business, just stay on right side of local or central governmental regulations.

In situations where a business owner mortgages an investment property (i.e. property acquired merely as an investment and which is most probably being leased out to a third party) as collateral for borrowing facilities, the banker will investigate the use to which the mortgaged property will be put to. This will be to guard against potential reputational risk on the part of the bank. As an example, if the property is being used as a children’s hospital or an orphanage, the bank will not want to incur any reputational backlash by attaching such a property should the property owner fail to honour his obligations with the banker.
In such a situation, it is possible that a borrower may be requested to provide alternative collateral.

The term was initially very common in political arena where it was used to refer to cash reserves set aside by a country for war or for a possible war. The term has however found its way into the business world.

This is money set aside by a business to deal with unanticipated changes or occurrences. These occurrences can either be threats or opportunities for the business. The ability or capacity to handle such unanticipated changes may mean the difference between failure and success. Absence of a war chest may curtail a business from snatching unanticipated opportunities which may lead to a windfall. The funds can also be used to fight off a hostile takeover bid or conversely be used to fund a takeover bid.

The war chest can be kept in the form of cash or as short term investments. In cases where the cash is not available, some business owners may negotiate with their bankers for a ‘in a case of need’ borrowing facility which will enable them to deal with the unanticipated changes.

Procurement refers to the purchasing process that controls quantity, quality, sourcing, and timing to ensure the best possible total cost of stock holding. As a business operator, you need to ensure that the stock you are holding is of good quality so that you keep your reputation intact. In this regard, it is important that you maintain good relations with reliable suppliers and this may entail paying in good time. At the same time, it is critical that you also hold the right quantities of stock.Overstocking will work against you in that you will have money trapped in stock which could otherwise be usefully applied elsewhere.

The just in time (JIT) method of ordering stock may the best one.By this method you buy the stock just when it’s required  either as dictated by the demands of your customers or your production schedule(if you are a manufacturer)

Procurement has the following critical stages. The stages of procurement are as follows

1. Information gathering-compiling a list of possible suppliers.

2. Developing supplier contacts – gathering more in-depth information about the potential suppliers, making background checks and even seeking the opinions of colleagues who may have dealt with the suppliers before. This process may lead you to cutting down the list developed in stage 1 to possible two or three suppliers for whom you will now seek to establish initial contacts.

3. Negotiations. You approach the selected suppliers and negotiate price and terms, terms and delivery schedules and modes. Also deal with following questions at this stage

At what stage will the stock be said to be in possession?

The supplier will provide insurance cover up to what stage?

What frequency and quantities of reorders can supplier handle?

Are reorders a condition for continuing relationship with supplier?

4. Storage. One cannot overemphasize the need for adequate and appropriate storage facilities otherwise the stock will be lost through damage by the natural elements, theft or even rotting.

Tax avoidance (or tax mitigation) – Avoiding payment of tax or paying reduced taxes by means that are within the law. Tax avoiders use the tax laws to their advantage. In the United States, reference is usually made to the Gregory v. Helvering case where the Supreme Court ruled that “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.”

Tax evasion –this refers to efforts by businesses or individuals to avoid paying taxes by means outside the law. This may entail misrepresentation, concealment of information or falsification of records. The likely result is prosecution by the responsible authorities.

The rate at which how fast your business is ‘’burning’’ (consuming) cash. The measure is useful especially in a start up situation where the business ‘’burns’’ up a lot of cash before any revenue is realized or alternatively if you want to gauge how long the business can withstand a recession.

Burn Rate = Current Assets/Average daily operating costs.

The figure for current assets will be derived from the balance sheet while the average daily operating costs will come from the income statement and cash flow statement.

In a cash crisis situation, you cannot continue in a ‘business as usual’ mode. There are some emergency and sometimes painful measures that have to be taken. Here is a list of some measures that may help.

1. Prepare cash flow forecast and review performance on a regular basis and investigate any variances. Regular review of cash flow forecast will enable early identification of unnecessary cash leaks.

2. Keep the authority to make purchases and payments high up in the organizational hierarchy.

3. More cash from trading- where possible (and through negotiation), reduce credit periods for your customers and increase credit periods from your suppliers.

4. Resort to consignment stock arrangements with suppliers i.e. pay your suppliers only when the stock is sold.

5. Where possible raise prices but you must be acutely aware of how sensitive sales volumes will be to price.

6. Keep overheads in check – telephone and vehicle costs are usually top suspects.

7. Advertising- develop measures to assess the correlation between advertising and sales. Get rid of all advertising that does not lead to significant sales.

8. Training programs – retain only those that are critical for business continuity.

9. Sell surplus fixed assets

10. Under-utilized assets can be hired out or surplus space could be let out.

11. Capital expenditure – this must limited to expenditure that improves profitability in the short term or will contribute significantly to the long term turnaround strategy.

12. Seek cash injection from new investors –  however a word of caution  – seek only those investors who have a long term view rather than those after a ‘’quick buck’’.

For a committed line of credit, the bank notifies the customer in writing who in turns pays commitment fees for the facility. In other words, the bank will be ‘committed’   or obligated to avail funds to the customer under such an agreement.  The only way a bank may deny a customer   a   loan drawdown   under such an agreement is when the customer has failed to comply with certain loan conditions.

However, an uncommitted limit is advised to the customer but may be withdrawn by the bank without prior notice.

Hence whenever you are presented with an option between a Committed Line and an  Uncommitted Line of Credit, kindly consider the pros and cons of each type of facility. While the committed line will be more expensive, you are assured that funds will be available to you when you require them.  The Uncommitted line will be less dear but you can never be assured of loan drawdown.

Banks are increasingly getting sensitive about management of environmental and social risk by their clients. Environmental risk refers to damage to the environment resulting from pollution or destruction of the natural environment. Social risks arise out a company’s failure to meet acceptable standards of business ethics and employment conditions.

Even if you present a bankable proposition to your banker, your request may be turned down if the level of   environmental or social risks in your business is considered too high or poorly managed. Poor management of these risks usually attract bad publicity. The stance by banks is that if they fund such operations, their names will be dragged in the mud together with their clients. Some of the banks have built solid reputations over a long time and will not want to risk reputational damage by blindly pursuing the profit objective.

After you get a loan from your bank, there are some housekeeping matters that you need to attend to  ensure that you build your reputation as a responsible borrower and increase your chances of getting more loans in future

1. Maintain good account conduct.

(a)If you have an overdraft facility, do not get beyond the credit limit without first seeking authority. It is absolutely essential that you issue cheques that you have provided for so as to avoid incidences of returned cheques.

(b)Ensure all business proceeds are deposited into your operating account with your bank. This gives your banker a good idea about your business turnover.  From a banker’s perspective, account turnover is one of essential components in assessing a customer’s ability to repay.

Furthermore, if   all your business proceeds pass through the account, your cash flow management will be easier.

1. Avoid late payments of loan instalments. If you foresee a situation where  payment for a particular instalment will be late, advise your banker in good time and also give an indication as to when payment will be expected. However, ensure that such circumstances do not become the norm.
2. Monitor your stock, debtors and creditors. Funds trapped in slow moving stock or slow paying debtors may negatively affect your ability to service your debt at the required times. If your creditors are not paid on the agreed dates, they may blacklist your business. This may harm your credit standing even among the banks.
3. Ensure funds are utilised for the purpose you stated in the loan application.
4. Inform your banker about all the key changes to your business.
5. Ensure all loan covenants are respected.
6. If your loan is secured by asset that is insured, it is essential that the premiums are kept up to date

These are some of the simple things that you can do to make your banker eat off your hands and enhance your chances of getting further assistance in future.