Dealing with Banks

Posted on October 7, 2007

All banks make a good show of listening to you. But only some banks really hear what you have to say. There are strategies you can employ to improve your banking status, and back-up plans in case the relationship turns sour.

Most CEOs have a love-hate relationship with the notion of borrowing from the bank. Sometimes bankers are eager to loan, and friendly. At other times, they are demanding, even aggressive in collecting money. The truth is they are businesses themselves, looking for ways to make profit through money lending. Get used to it.

Banks partner with businesses as suppliers of cash only when they are convinced that it is a smart and profitable deal for them. When being your cash partner looks too risky, they run for the hills—and they should!

Every bank loves making loans to “golden” companies, but no commercial bank wants high-risk loans. Much of the profit for a bank comes from the loans made in grey-area situations, where it takes an understanding of the business beyond the financial statements to make a good decision. So it’s the companies that are in the middle range, or “gray area,” where it’s critical to convince the bank that your business has very low risk.

Will They Hear You?

All banks make a good show of listening to you. But only some banks really hear what you have to say. Your goal is to work with someone senior enough at the bank that their opinion matters. This is someone experienced enough to understand your business and able to write their perceptions down in a credible form. You see, every loan a bank makes has a narrative in the file written by the bank, explaining why the loan is prudent. This gives life to the numbers. The bank’s auditors and the regulatory agencies will read that narrative. Making sure your story is told well in that narrative is critical.

The bank cares deeply about your ability to run your business well. It’s key to paying back the loan. What can you do to prove your business competency? Right from the start, show them that you are financially savvy; understand your own business as well as the nature of the banking relationship. Be forthright about your situation—especially anything that they could discover on their own through analyzing the statements. Trying to hide something that they will discover on their own is a fast way to damage their trust in you or their faith in your competency.

Most bankers want to know everything about your business. Most bankers will say, “It always works best when we have regular dialogue with our customers.” Yet most CEOs worry about unnecessarily spooking the bank. My advice is to share small issues and victories with them on a quarterly or bi-annual basis. If anything major happens, you probably need to share this with them as well. Keeping them updated shows that you are in control of your business – not vice-versa.

Bankability

Knowing how bankable you are is always critical. And it’s not a yes or no. Some businesses are incredibly creditworthy—anyone would loan them money. Others are fairly bankable, and some are barely bankable. After the bank renews your line of credit each year, be sure to ask them their opinion of your firm’s creditworthiness versus where you stood a year ago. The idea is not to wait until the bank calls your loan to deal with eroding financials. You should solicit feedback from your bank so you can take action well before it’s too late.

When a bank has concerns, the first thing they do is to ask for more frequent reporting. It helps them catch issues before they are too late and gives them time to act as a consultant to the borrower, often restructuring debt or making other suggestions. If your bank is concerned enough to ask for more frequent reporting, pay attention and figure out what you need to improve.

Ratings

Banks rate every loan. Being rated “pass” means your loan is OK. But when you slip, the first downward rating is “pass-watch,” then “sub-standard,” then “non-performing,” then “loss.” If you’re an existing borrower, they might renew you on a watch status. But if you’re substandard or below, they have already pulled your loan.

Keeping up a second banking relationship is a great idea. You may have only a few accounts there, or a minor credit facility. But any history with a bank is important. If your primary lender has issues with your loan, you’ll have a second bank that already knows you—a big help if you need to switch lenders.

Realize that if your financial position is so poor that banks are afraid to loan you money, then no amount of talk, positioning, or anything else will help you get the loan. So if borrowing money is what you know you need to do, run your business such that your financials will look solid from a bank’s perspective.

Takeaways:

• Choose a bank where you have direct contact with someone whose opinion matters at the decision point.
• Keep up communications with the bank—appearing less than forthright is never good for the relationship.
• Monitor over time how healthy your bank thinks you are. If they think your bank-ability is slipping, start planning other options.