Getting a Bank Onboard

Getting a Bank Onboard

In today's fast-paced and competitive business landscape, securing the right financing is crucial for the success of any project or deal. One of the most reliable and time-tested sources of funding is banks, which play a pivotal role in shaping the financial landscape and supporting the growth of businesses across various sectors. In this blog post, we will explore the importance of getting a bank on board for your project or deal and how it can significantly impact the outcome and long-term viability of your endeavours. We will also provide insights from the Financial Modelling Podcast, where industry experts share their knowledge and experiences on effectively engaging with banks and leveraging their resources for optimal results. So, let's dive into the world of bank financing and uncover the reasons why partnering with a bank can be the game-changer for your project or deal needs.

What the bank requires in return is near certainty that they will be repaid their principal (the amount they are lending you) and interest (the cost of debt).  This allows you to put in less of your own money for the same project return, which increases your equity return.  While I won’t explain the finance principles here, understanding why debt is useful, both from a leverage and interest deductibility viewpoint, is critical to maximising your returns on any deal.  This might range from buying a rental flat to buying a manufacturing facility.  Gearing also frees up your equity to invest in other deals and diversify your portfolio.

Banks and lenders – are risk-averse and come with complex requirements, but are necessary for gearing your project and leveraging your returns.

While a bank will require extensive documentation, this, for an entrepreneur, is not necessarily a bad thing. An entrepreneur, by nature, will need to focus on multiple deals and opportunities and may not always focus on the detail a bank would require.  By making this information mandatory, the entrepreneur is required to focus their attention on the minutia, every small detail that makes a deal tick. This level of understanding equips the entrepreneur to negotiate on the things that matter and relent on the things that don’t drastically affect their returns.  It also forces the entrepreneur to be organised and methodical.

 

As Jocko Willink says, with Discipline comes Freedom, and in finance, focusing on the detail means a greater understanding of the bigger picture. Entrepreneurs need a basic understanding of finance and the ability to model their deals.  That said, most entrepreneurs will need debt to accomplish their deals – they may not have enough equity, or it will be invested elsewhere.  A good bank should also become a trusted partner, advising you on deal structuring and warning you about potential pitfalls and risks.  Forming this partnership will serve every entrepreneur well! 

Good luck and happy financial modelling