Working More Effectively with Your Bank
Nov 12, 2007
Like it or not, most firms in this business of any size have to borrow money. Whether the firm needs the money to provide operating capital while waiting to collect accounts receivable, to finance business vehicles or equipment, or to invest in office buildings; in most cases, banks will be the source of the funds.
If you have a chance to study how banks actually operate, you’ll quickly learn that their primary thrust is to avoid risk. They can’t afford NOT to avoid risk— they borrow money at roughly 4%, and lend it out at an average of about 8%. That 4% “spread” is how they make their money. The formula doesn’t allow for many mistakes!
With an understanding of the tolerance for risk that most banks have, and some election-year murky financial waters possibly ahead, here’s my advice for making the best of your banking relationship:
Make friends with your banker. The better your banker knows you, the more likely he or she will try to do you favors or go to bat for you should you need it. That takes a little time, and it’s not always easy, but most commercial lending officers are pretty sociable types who want to know their customers.
Keep your banker well-informed. Good or bad, keep your bank in the loop. They don’t like surprises. Surprises increase risk. They don’t want to learn that you’re not going to get out of your credit line this year when the year is over. They also don’t want to hear that you’re going to take a loss in December after the month is done. Pass along your financials and the CEO’s interpretation of them to alleviate fears and reduce the bank’s risk.
Have more than one bank. Even if you have just a small savings account in another bank, it can be helpful if you ever need a second source to borrow from. You’ll possibly be treated differently because of your customer status.
Try to keep your real estate borrowing with a different bank from your “regular bank.” This isn’t easy as your bank will want your real estate loans, too. But doing this helps in cases where your real estate gets devalued (this can happen) and the risk-averse bank decides that you have insufficient collateral for your real estate loan. You don’t want them canceling your line of credit used to finance accounts receivable at the same time as telling you to find a new real estate lender.
Don’t be afraid to ask for something you need. If you need something like a sweep account that takes all your excess cash at the end of the day and moves it to an interest-bearing account, and your banker has never offered that to you, ask!
Know your covenants and meet them. If you have to meet a particular debt-to-equity ratio, meet it. If you have a “clean-up” clause that mandates you are out of your line for 30 days each year, do it. Know your covenants and treat them seriously. Your bank won’t necessarily cut you off right away if you don’t, but as avoiders of all risk, it will cause concern.
If things aren’t going well, show the bank your plan for what you’ll be doing to turn it around. Bankers are pretty good business people and have a continuous business education provided by case after case (their clients). They can understand what your plans are to make things better if you tell them. It may not be what they always want to hear but they will appreciate your honesty.
If things are going well, increase your credit and try to get your covenants relaxed. The time to ask for more is when things are going well, not when they aren’t. Think about it— why would a risk-averse bank lend more money to any client who isn’t performing? It’s irrational.
Show this article to your banker. See if he or she doesn’t agree that most of these points make sense. Ask the banker what else you can do to make his or her life as a lender to your company easier for the financial institution. My guess is that your banker will appreciate the opportunity.
Originally published 11/12/2007
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Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.