Is pharmacy an attractive market from a bank’s perspective?
There is £12bn of revenue generated by prescription medicines in the UK annually, £3bn of revenue from over-the-counter drugs and an additional £11bn revenue market in health and beauty, which is part of community pharmacy’s offering. A revenue market of this size is interesting to any financial institution because it creates opportunities and businesses that want to grow.
There are also significant barriers to entry to open pharmacies on the high street. Most high street businesses can see competition open next door to them without any barriers. However, you need a licence to operate a pharmacy business and so it is unlikely that someone will come along and steal your market.
Also, the pharmacy business is underpinned by a strong demographic. Most prescriptions go to those aged over 65 years. We have an ageing demographic in the UK — the number of people aged over 60 years has grown by 2Â–3% between 2006 and 2013. This has contributed to a 4% increase in prescription volumes over the same period, which is ahead of growth in gross domestic product and inflation.
Pharmacy in the UK is not an over-saturated market compared with other parts of Europe, so I would not anticipate huge numbers of closures — it is a stable dynamic, which is great from a bank’s perspective.
Together, this means that you should be pushing on an open door if you are hoping to raise finance for your own pharmacy business.
What will a bank look at before it decides to invest?
Despite what you may have read in the media, banks do want to lend money and we do want to bring in new clients. Loans and new clients are the corporate lifeblood of our business. We are, however, debt providers and not equity providers. That means we will be looking for some form of investment from the owners or investors in the business — they need to come up with some cash contribution. We will then provide debt behind that to enable a business to grow or to be acquired.
Banks will emphasise the cash flow; although profit is important, it is ultimately the cash generated by the business that the bank will be focusing on.
What can independent pharmacists expect from their bank?
The bank should be able to provide you with a range of services and capability that you need, enabling you to grow your business. They can provide loan finance to acquire a business, working capital support via overdraft or Invoice Finance, and products to enable you to access your account details online and make payments to employees and suppliers.
The bank should be proactive and interested in your business. You should not have someone from the bank who just turns up once a year and asks you a couple of questions, ticks some boxes and goes away. You should have someone who is interested in what you are doing, so they can try to add value to your business. Ideally, you should find a bank adviser who has some sector knowledge and understanding of what you do. They are more likely to understand the dynamics of what is going on in your company because they have other similar customers or other allied businesses.
There should be an acceptable speed of response. You should be able to lay out what you want and agree on a timeframe for the bank to deliver it. If it is not delivering on a consistent basis then try to find a bank that can.
What will the bank expect from you as a customer?
The bank will want you to be open with it. You should be sharing your aspirations and your overall strategy. Do you want to acquire more businesses? Have you got an exit strategy? Do you want to sell the business at some point to retire?
If the bank does not know these things, it is unable to understand where you are trying to take your business and provide you with the type of products and services that can help you. Your advisers also need to tell your story to those within their own organisation — if they do not understand it, they may end up telling the wrong story internally.
A banker is likely to ask about a contingency plan in case things go wrong. This does not mean that such a plan has to be fully formed, but be prepared to be asked for this type of information.
How will your business be assessed?
If you come in to borrow some money, your banker will undertake a detailed review of you and your plans. He or she will then start to assess external factors and influences that may impact your business. They may talk to you about this overtly, or they may be doing this back in their own offices and preparing reports for their own internal credit purposes.
The bank will only be looking for answers to questions that the owner and investor should already have thought about. Borrowers should have thought about the risks surrounding their business so the bank’s questions should not come as a surprise. The bank is not looking to catch borrowers out but instead make sure they have thought everything through.
The bank will undertake a SWOT-style analysis to assess the strengths, weaknesses, opportunities and threats to your business. You should be talking to the bank about those issues to help your bankers to make the correct judgements about your company. The bank might also need to look at some form of broader economic model, such as PESTE, which involves looking at the political, economic, social, technological and environmental influences on your business.
There is a lot of competition out there, so the bank will ask about what you will do to differentiate yourself. This is where having a banker who has got some sector knowledge is useful because he or she will be able to question you about the things that you are doing, including any special services you offer. The banker will be looking at where you have competitive advantage in your market.
If the loan request is rejected, the bank should advise the potential borrower what he or she needs to do to make the proposal more supportable. Depending upon what is required, the bank may introduce other professionals who could potentially provide help, for example by preparing business plans or introducing more equity. It is also worth bearing in mind that just because one bank declines a request does not mean another will not lend — different banks have different risk appetites.