The warning is real
You’ve heard the old one – that a banker always seems willing to offer a loan when you don’t need it. For small businesses, there is such truth in that statement that you can trust the story to be based as fact from experience.
Exceptions and good reasons to work on them
There are great exceptions for growing businesses and for businesses that have a track record with a banker. Working capital loans and lines of credit are needed for growth and during times of business stress. If a business were operating above breakeven and revenues and expenses steady, profits would flow to either the shareholders’ pockets or to working capital and taxes. Each cycle gives the CEO a chance to use those profits to some positive advantage, including increasing the marketing budget, paying down loans, building working capital, increasing reserve cash balances or paying shareholders.
The scary exception
But if a good business finds itself in a bad downturn, there may be a need that did not exist before for temporary cash, even as management reacts and moves to trim fixed overhead.
Relationship banking and you
[Email readers, continue here…] Approaching a banker during such times tests relationships. If there was no previous relationship, few bankers would rely upon anything but a personal guarantee backed by hard assets before considering a loan. But for those wise executives who included their bankers in occasional update calls, press releases, invitations to company events and an occasional personal visit, the strength of the relationship will often show its benefits during times when lending rules of the bank are near the “can’t do it” point.
How about existing loans outstanding?
For those with existing bank loans, that constant attention is more than just important. As loan covenants become closer to being violated or after such an event, bankers have some latitude in deciding how to handle their accounts.
The dreaded workout group, whatever the name
Upon discovery of a violation of loan covenants or even when a banker hears of bad news without prior notice or updates, bankers sometimes turn the company over to the bank’s workout group – a place you never want to visit. In the gray area where covenants are broken but barely, covenants can be waived for a period of time as companies rectify the problems, all based upon the quality of the relationship between banker and client.
It is during those challenging times that it is most difficult to tell your story to your banker, but it is just then that are the most important of times.
Dave — As a former bank CEO who “grew up” on the commercial lending side of the bank, I can assure you — BANKERS HATE SURPRISES. The key to a great relationship with the bank is constant and consistent updates. You should share not only good news, but bad news as soon as you are aware of it. You should meet regularly with your banker. My favorite banker story — and it happened to me early in my career: A stranger came in to see me at the bank. He said he wanted to tell me about his company, but was not there to open an account. He pulled out his financials and went over them for about a half hour. He then said, “I want someday to be a borrowing customer so I’ll just come back in the future and show you how we have done.” He repeated this ritual 3 more times over the next 9 months Then, one day, about a year after his first meeting, he came in, reviewed his financials and said, “Now that you know about me and have tracked my progress over the past year, I’d like to set up a line of credit.” It was an easy matter to accommodate his request and he became one of my best (and FAVORITE) customers. He kept up that great communication after he was on board,and we were able to work with him during both good times and tough times as well. There were NEVER any surprises and he kept us well informed.