Managing your banking relationship

Apr 26, 2010

If you aren’t worried about your banking relationship right now, you are deluding yourself. Besides the fact that we have already had firms in our business— large firms— put out of business by their banks, the banking business is a mess. Here are my thoughts: Keep yourself informed about the financial condition of your bank. You need to know if they are at risk of going under. There will be a whole new wave of bank failures coming when the commercial real estate devaluation hits. Your line of credit could be immediately revoked if they did get taken over by the regulators and it could be hard to get a new credit line quickly enough. Keep a realistic understanding of the value of any real estate you have in your business. Unless you own it outright, you probably have a five-year note and a 20-year amortization schedule. That means you have to get new financing when that note comes due. If your property won’t appraise, you could be forced to come up with more equity and lose it if you don’t— even if you have never been late with a payment. And, if that did happen, your line of credit to finance receivables could be at risk. Look ahead and be prepared! Talk to your banker. Besides getting his or her insight into the bank’s financial condition and help with fending off an appraisal-related real estate problem, you need to keep them informed of your financial condition and needs on a continuous basis. Both good and bad news has to be delivered. Banks don’t like surprises. Develop a back-up banking relationship. It may be smart to open an account or take a small capital equipment loan from another bank as a way to become a bank customer. That way, if you ever do need to find a new line of credit, you will be a current bank customer vs. a new one and perhaps get better treatment. Know your loan covenants. Besides your commercial real estate, if any, your real risk lies in your line of credit to finance cash flow. It will have covenants (requirements) that have to be met to keep the credit facility. Typical of these are things like a particular debt-to-equity ratio, a “clean-up” clause (this is a requirement to be out of the line for 30 days during the year), and more. Be sure you don’t violate these covenants, so your line stays available to you. We live in volatile times. Most design and environmental firms do depend on their banks. Take care to manage your banking relationship— especially now! Originally published 4/26/2010

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