Advice to Bank On
Apr 17, 1995
For most A/E/P and environmental consulting firms, working with a bank is a necessary part of being in business. Very few companies can get by without some sort of credit line to finance receivables or to buy equipment when it’s needed. But too often, we go to our bankers, “hat-in-hand,” when we need money. Many firms in this business don’t really consider what they should be doing to make the most of their banking relationships. Here are my thoughts: Communicate with the bank regularly so they are never surprised. One thing for sure about bankers— they absolutely hate uncertainty. Don’t put your bank in a position where they are surprised about your financial condition or need for cash. Give them regular reports, even if you aren’t bound to do so by your loan covenants. That way, they can better understand your business and why you need money when you do. View your bank as a partner, not a threat. One reason firms don’t tell their bank everything is that they are afraid of them. They shouldn’t be. Instead, ask your bank for help. They may be able to provide you with credit information on companies you are considering doing business with. They may be able to help you collect money owed to you. They may be able to refer clients to you. And last, but not least, they may be able to provide you with some free advice on running your business better. Make friends with your banker. No doubt about it, most of the personal discretion bankers had in years past about who to lend money to, or how to do things, is gone. But being friends with your banker can’t hurt. There’s always a benefit to having someone with access to capital who likes you, trusts you, and wants you to succeed. But you have to take an active role in cultivating the relationship. In today’s banking environment, this is no small feat— we commonly hear of companies that have had a half-dozen lending officers in an equal number of years. We’ve had five in five years ourselves. Don’t do all your borrowing from one bank. I used to advise A/E/P and environmental firms to consolidate their banking relationships in order to get the most bang for their buck. The real estate crisis of the late 1980s made me realize the fallacy in my thinking. Too many firms got into trouble when their building mortgages got upside-down due to a devaluation in their equity. That caused their bankers to evaluate their overall debt capacity and credit worthiness. As a result, it wasn’t unheard of for a firm to lose its real estate financing and receivables line of credit at the same time! Spread the money you have around. Since $100,000 is the most any one account is insured for, play it conservative and keep your money in more than one place. Having multiple accounts may help you get money fast, too, if you ever lose your primary banking relationship unexpectedly, because you’ll be able to go somewhere else that already considers you a client. Consider everything negotiable. Commitment fees for a line of credit, even one that is inactive— are not at all uncommon. Many large banks are asking for them. But most will be willing to waive these fees if you scream loud enough. Ditto for overly conservative debt-to-equity ratio requirements, personal guarantees, or exorbitant interest rates. And prime rate is not the floor. One client told us his firm is actually paying a half-point below prime! The only reason they are getting such a deal is that they asked for it. Get a “sweep account.” Sweep accounts invest any unused cash that is just sitting there— even if it’s just for the day. Most banks offer sweep accounts, though there may be an administrative fee. But banks rarely bring this kind of program to your attention. You have to ask! Be willing to move to a different bank. The days of a banking relationship that lasts forever— like most relationships, unfortunately— are over. If you are dealing with constant turnover in your lending officers and are sick of re-educating new ones (i.e., explaining to them why you have no “inventory”!), if your bank wants more from you than you care to give, or if your bank makes you feel like you are doing them a favor by giving them your business, maybe it’s time to go elsewhere. Because right now, believe it or not, lots of large and mid-sized banks are out there courting small and mid-sized A/E/P and environmental firms to get their business. The timing may never be better. One last point. The responsibility for handling your banking relationship shouldn’t be pushed too far down your organization. This is commonly something that the CEO and CFO work on together. Originally published 4/17/1995
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