Revisiting your Banking Relationship – Time to get back into the water

Needless to say that the mortgage meltdown a few years back shrunk the number of viable banks and set the table for numerous acquisitions in lieu of failures.  The backlash was that companies coming off of the impact to profits, cash flow and liquidity issues from the recession found banks were not very interested in lending money unless you had plenty of your own.

Numerous businesses found that their friendly banker was either no longer friendly or no longer wished to be their banker.  Lines of credit were suspended or terminated, failure of meeting loan covenants became a serious event that at a minimum was costly and time consuming.  The real risk was that more companies were now not “bankable”.  They no longer could find banks willing to offer loans, much less compete for their business banking relationship.

Banks were under orders to shed their loans and non-performing assets, meet new federal regulations and fearful that if they could survive they would not touch risky loans any longer.  Who would blame them as we came through a period of loans being offered to fund mortgages to borrowers who could not prove they had the income to support the loans and at leverage ratios that make no economic sense.

As a new partner with B2B CFO® in 2009 and 2010 I found many strong companies with decades of historical profitability, assets and in some cases large bank accounts who were being threatened with dealing with the dark and sinister side of the banking world with names like “special assets” and “workout” groups.

These departments of the banks exist to deal with terminating relationships with debtors who used to be valued banking business relationships.  The reality is the bank must minimize the risk and maximize the return of funds that were leant to the companies to fund, operating lines, equipment and real property loans.

What my clients were facing was trying to get their company to be seen as a good long term banking customer who was recovering from an economy that cut into their corporate and personal net worth, liquidity, cash flow and profits.  Loan covenants and the violation of them were the rule of the day.  If you were not within the covenant (debt service coverage ratio, debt to tangible net worth or some other combination of factors to assure that the company was able to meet its debt repayment obligations) you were on the “naughty” list.

In many cases it didn’t matter if the company never missed a payment, sometimes due the owners who had cut their own salaries or even had more cash in the bank then the loan amount.  If you violated the covenant that the bank had you agree to on your loan you were at risk of forbearance agreements, additional banking fees and new reporting requirements.

This season of business had many companies looking for banks that would work with them and consider reasonable ways to allow the company to right the ship in the midst of troubled economic waters.  I found a large part of my time was helping those companies sustain, retain or survive their bank’s demands.

What has changed? Well as it has in prior decades we have moved to a growing recovery that despite limited is allowing companies to demonstrate profits, cash flow and increasing net worth.  This has allowed many companies to work with new bankers to build relationships around conservative but reasonable covenants.

Within the past year I have worked with several banks to increase lines of credit, refinance property and equipment loans and establish solid relationships where the banks are serving to meet the needs of the business.

Competing banks who are treated like valuable providers of capital now are demonstrating that they want to find the interest rates, security, subordination, guarantors and other terms that will land the business.  During 2013 my experience with several of my clients has placed new loans for over 60 million dollars.  The competitive environment in the market today is allowing the business to get terms that are reasonable.

In our firm’s book, The Danger Zone we have a chapter that spells out that in order to have a strong relationship with your banker you need to treat them like your best customer.  Find out what they want and get it to them.  Meet or exceed their expectations and comply with request timely.  Wouldn’t you do that for your best customer?

Now is the time to get back into the water, of swimming with the bankers.

  1. Consider getting your annual projections done for 2014, including cash flows, balance sheet and income statement.  This will provide both you and your bank the information needed to show how much of a line of credit or loan you need and how you will be able to make the debt service payments.  This will also prove your intent to build the capital in the company that will
  2. Prepare updated personal and entity level financial statements of all potential guarantors.
  3. Know the underlying factors of your loan covenants and how changes in your debt structure, liquidity and profitability will impact them.  From this base of knowledge you can ensure you agree to covenants that you are reasonably expected to meet, even with some decrease in your profitability.
  4. Match the expectations of your bank with those you hold so that you can either meet or beat those expectations.

By following these rules and disclosing your desire to work to get the best terms you will find that several banks may now compete for your business’s banking relationship.  By using the same approach I have expanded lines, decreased guarantors and security and lowered interest rate and the overbearing loan covenants.

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