Know your banker before you need them

AEC firm owners should understand how their bank works long before they need financing, flexibility, or help navigating a problem.

I have worked with a lot of banks over the years. At one point, the debt across my various businesses and real estate investments probably exceeded $20 million. That felt like a lot! I have borrowed money, negotiated credit facilities, bought buildings, financed acquisitions, and learned a few things about how bankers think. One lesson stands out: the time to figure out how your bank operates is not when you desperately need it to lend you money.

A lot of AEC firm owners have banking relationships but don’t really understand them. They have a line of credit, a mortgage, and maybe a term loan to buy out a departing partner. They sign the paperwork, make the payments, and assume everything is fine. That works until it doesn’t. Then they discover that their bank has rules, covenants, lending limits, and a credit committee that doesn’t particularly care how long they’ve been customers.

Here are a few of my thoughts:

1. Your bank can finance your ambitions. The obvious benefit is working capital. Most AEC firms pay employees every couple of weeks, but as we all know, our clients don’t necessarily pay us on the same schedule. A line of credit can bridge the gap. Banks can also finance your office buildings, buildouts, vehicles, survey equipment, acquisitions, and ownership buyouts. Depending on your circumstances, your banker may help you structure financing to pursue opportunities that you couldn’t otherwise afford.
2. There is more to banking than borrowing money. Many banks offer treasury management services to simplify payments and protect against fraud. Some can manage your 401(k) fund. Ask what else your bank can do for you. You might be surprised, although don’t expect free lattes and French pastries every time you go see them.
3. Get your banker involved before you need their help. If you’re considering an acquisition, buying your building, or buying out a partner, start talking to your banker early. Banks have underwriting procedures, documentation requirements, and approval processes. None of those gets easier because you need the money by Friday.
   I’d rather have a banker who understands my plans than one who first hears about them when I show up with a 90-page acquisition agreement and a desperate look on my face. The former is planning. The latter is a hostage negotiation.
4. Know how your line of credit really works. A $2 million credit line doesn’t necessarily mean you can borrow $2 million whenever you want it. If it’s secured by accounts receivable, the amount available may depend on the age and quality of your invoices and how your numbers work in the bank’s borrowing-base formula.
   Read your loan agreement. Understand your covenants, collateral requirements, personal guarantees, and any requirement to pay down the line periodically. Ask questions before signing. It’s better than explaining to your employees why you can’t issue paychecks on time.
5. Build relationships and have alternatives. I’ve always appreciated banks where I could get to know the people making lending decisions. My first company’s bank, Bank of New England, failed in January of 1991. Although our small credit line was ultimately honored, the experience taught me something about depending on a financial institution whose future you cannot control.
   A banker who understands your business may be better positioned to advocate for you, but friendship doesn’t override credit policy. Maintain a primary banking relationship and get to know another bank, too. Banks sell, lending officers retire, and lending policies change. Having alternatives is good management practice and not disloyalty!
6. Give your banker something to believe in. Bankers want to know how they’ll get their money back. Your firm’s cash flow, project profitability, backlog, client concentration, and collection history all help tell that story. Keep financial statements current, prepare realistic cash flow forecasts, and explain how you intend to use any borrowed money. And please don’t confuse a big backlog with a healthy business. Backlog that is poorly priced, unprofitable, or dependent on a client who pays whenever they feel like it isn’t necessarily good news. Revenue is nice. Profitable revenue that turns into cash is a whole lot nicer.
7. Tell the truth when things go wrong. If a major client delays payment, a project loses money, or you risk violating a loan covenant, call your banker early. Explain what happened and what you’re doing about it. Surprises make lenders nervous, and silence usually makes them imagine something worse than the truth.  A bank may help you navigate a temporary cash shortage. It’s much harder to get help when you wait until payroll is threatened to disclose a problem you’ve known about for months.
8. Don’t try to make the bank your CFO.  A line of credit can solve a timing problem but it can’t fix poor project management, chronic underpricing, excessive overhead, or an accounting department that treats overdue invoices as a minor administrative inconvenience. Borrowing to cover recurring losses without a credible turnaround plan simply postpones the reckoning.

Ultimately, running your firm is your responsibility. Manage your people, price your work properly, watch your cash, and collect what clients owe you. Your banker can be an important partner in financing growth and managing risk, but they can’t do those things for you. Treat your banker as a partner, communicate honestly, understand the rules you and they have to play by, and build the relationship before you need a favor. And remember: your banker may be your friend, but your banker still has a board, a boss, a loan committee, and a spreadsheet that has to work. It’s best to keep all of them happy.

Mark Zweig is consultant at SNZweig. Contact him at mzweig@snzweig.com.