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Bankers: love ’em or hate ’em. They may affect your future.

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.  For a start…

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.

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.

[Email readers, continue here…]  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.

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.  Sound a bit dramatic?

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.

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.

It is just one more of the things a good manager does to ensure the ultimate success of an enterprise.

  • Allen Clason

    Dave, excellent article with an outstanding word toward communication. And since I know Don, your reply is wonderful. This is not to minimize the other quality replies.

  • Michael O'Daniel

    One thing that wasn’t mentioned in this post, which I would hope anyone reading it knows anyway, is that debt takes precedence over equity. If you have loans or lines of credit with your bank, all the more reason to be proactive about maintaining a close relationship. A bank can choose to shut down / take over your business even if all the other indicators are that the business is in good shape. You can be particularly vulnerable to this happening when a smaller bank is acquired by a larger one, or when there are managerial or policy changes within the bank itself. I personally experienced a situation where a debtor bank executed a “friendly” takeover of a privately held company, wiped out all the investors and creditors, and re-opened the exact same business under a different name. But that’s another story for another time.

  • Don Kasle

    Dave — You knew I would have to respond to you post given my 30+ years in commercial banking and as a 3-time bank CEO, as well as having sat on 6 different bank boards of directors.
    You are (once again) spot on with your comments.
    The real key in building a relationship with a bank is best described in 3 words:
    1 = Communication
    2 = Communication
    3 = Communication
    Back in my early years as a commercial loan officer, I once had a company CEO who had a small checking account with us, come to me and ask if he could share his financials — even though he did not want to borrow any money at that time. I told him “sure” and we met for over an hour going though them. 6 months later he came back and did the same thing. This went on for 2 years and then one day he came in — with financials in hand — and said, “I’m here to borrow money. Can you help me?” I had watched and learned about his company over the 2 previous years. I understood his company, knew all about his management, understood his customers and the various vulnerabilities that the company had. I was very knowledgeable as he had prepared me so well — by over-communicating with frequency and detail. I was able to approve him the same day and he went on to be a GREAT borrowing customer with the bank for many, many years. I have often told that story in explaining to entrepreneurs how to establish a sold banking relationship.

  • I love the article Dave and the importance of establishing a good banking relationship with the banker. As a Business Relationship Manager (also going on my 30th year in banking altogether), I have had the opportunities to help and watch companies go through growing pains. I am also the 1st stage “workout” banker before the actual workout.. :). At this stage, open communications from the client makes my job easy to fight for their business to continue good solid relationship with the bank. We understand companies go through rough times, we just need to understand why to help offer solutions and alternatives. We conduct as much qualitative analysis as much as quantitative. Sometimes its not always the numbers…we like to drill down behind it. We are here to partner and help businesses. Given banking, like anything other industry, has become overly competitive, what differentiate banks are the relationship bankers have with their clients.
    Thanks Dave!

  • Readers,
    John Huston (see comment above) is too modest. A bank president during his career, John became the penultimate angel investment guru in his second career and has created more important teaching materials and performed more teaching events than most any individual anywhere. (With mutual nods to Bill Payne, the Angel King.) Thanks John for your comment. See you in Boston!

  • John Huston

    You may recall that I squandered the first 30 years of my business career in commercial banking, Dave. I loved your comments! Hope to see you in Boston……Cheers, J.

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