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Berkonomics

Well, now we know how bankers control our business lives!

Let’s get right down to it.  Your banking relationship can be like a great marriage or a bad trip to the DMV.  In most cases it is strictly your choice.  But the results of that choice will reverberate for what could be years.

Yes, we will spend a moment reviewing the SVB-Signature Bank crisis that recently left many of us losing sleep. But we will do this in the context of our decision-making and protection of our businesses.

For a start…

Did you even think of spreading your banking risk when receiving your first investment? Only 18% of SVB’s deposits were insured.  Yes, I know much of this excess was from companies with lots more in the bank that we will even have.  So, ask yourself if any of the executives or investors for those companies even considered spreading the cash among several banks just for safety?

We want to impress our bankers.

That’s natural. We may need our bankers when times are tough. Larger deposits now do impress bankers.  But looking back on the SVB crisis, we dodged a bullet.  Would we do it again?

Don’t le banker control our businesses.  Think: protection first. Impressions second.

Now to the reasons to want to impress your banker:

How did you open your first bank account?  Did you just walk into a branch, fill out the forms, take your first ten checks from your newly-opened account and leave?  Do you even remember the name of the bank employee who helped you with that transaction?  Well, that would have been your first mistake.  As I’ve found in numerous companies over the years, the initial visit sets the stage for an entire relationship to follow.

[Email readers, continue here…]   But why bother with a relationship if all you want is a checking account?  Well, it’s time to tell a few true stories to illustrate why you should cultivate a relationship with a banker.  And it is never too late, even if you opened that account years ago.

Here’s an example – an unintentional overdraft in your checking account.  Most of us have suffered this at least once if not more often.  Whether caused by sloppy accounting or bad cash control or by a third-party taking money from your account for a recurring charge – or even by a PayPal purchase not recorded in the books, people or companies with marginal checking balances will someday be hit with an overdraft.  Today, many banks charge $35 or so for each check paid with insufficient funds.  One of my companies was recently hit with ten such charges in a single day before they realized the error, resulting in $350 in overdraft charges in a single day.  So? Here are two alternative responses.

Relationship banking: If the CEO or CFO had no relationship with the banker in charge of the account, there is little chance of receiving a waiver and reversal of the charges, even if your history with the bank is flawless.  On the other hand, a good relationship and established history could and would usually result in a call to the banker, a short and rational explanation, followed by your banker’s immediate promise to reverse the charges.  Yes, if this habit becomes routine, all bets are off, sometimes including whether the bank will keep your account open for you in the future.

And there are more important issues.  Most business banks will grant a $50,000 line of credit through a bank-issued credit card, often requiring a personal guarantee.  That is an expensive alternative, with costs for amounts carried over even for a few days beyond the due date running between 8% and 24% when annualized.   With a good banking relationship, your banker can help with a line of credit at reasonable rates, fitted to your needs, and established in a way that will not drain cash each month affecting business health and growth.  Yes, most banks will require a personal guarantee for such lines of credit, and even for equipment, receivables or other secured loans.

There is usually one exception:  Some banks, especially those known as “venture banks,” will recognize the issue of a company with multiple investors, especially with a venture capital company as one of those.  By substituting a small number of warrants to purchase stock in the company at a reasonable price for what would have been a personal guarantee, those banks will eliminate the need for the founder or CEO to sign such a guarantee, trusting instead the relationship with the VC company as of overriding importance.

Then again, this is how SVB got into trouble.  They cultivated relationships with companies where VCs do their business and suggest this for their portfolio companies. So, remember “protect the business.”

There are many types of bank loans, including those guaranteed by the Small Business Administration (SBA) in which the bank and SBA share the risk for the loan.  It is worth spending time with your relationship banker to discuss cash management, banking needs, and various opportunities.

But what happens when something goes wrong?  Sometimes you get into a cash bind and cannot make a payment or even need to restructure a loan.  This is the time when your personal relationship with your banker makes or breaks a company.  Sounds a bit dramatic.

But think this: It is better to owe the bank than have them owe us!

Ever hear of the “workout” division of your bank?  I hope not. That is the group your banker turns to when your account has shown signs of being too high a risk for the normal banking relationship.  Your banker is removed from the process once that divide is bridged, and you are introduced to a “workout specialist” who dictates your banking future, typically by establishing new rules requiring accelerated repayment, perhaps sale of assets, direct bank collection of receivables to pay down loans, and other mild to draconian efforts to protect the bank and reduce its exposure.

You do not want to be sent to workout. 

The risk is that the workout division will become much more aggressive when the bank is in trouble.  Sound like a possibility here?

On the other hand, if you have been communicating your progress both positive and negative to your banker on a regular basis, that person can mitigate the more draconian moves if she or he understands the reasons for a temporary setback, having history and confidence in your abilities to work through the problem.

So, it is all about the relationship you establish when first walking in the door of your bank.  And it is not too late if you failed to do this back then.  You may not know who to call, and a cold call or visit to the local branch is a good start to establish that relationship and begin or reinforce the positive aspects of the banking experience.

This, along with thinking of protecting the business, It is just one more of the things a good manager does to ensure the ultimate success of an enterprise.

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