This article is an extract from Uncle Ralph's, "Don't Do It the Hard Way" and the advice on managing your banking relationship is always relevant. Read the book.
Is your Bank a Welcome and Willing Partner in your Business?
If not, then you need to make changes.
Entrepreneurs are usually quick to agree that banks are an obstacle to their success, rather than a key supporter. Most business owners certainly do not consider their bankers as welcome and willing partners in their business.
Yet it is an important relationship that will often affect your ability to grow and to survive periods of financial stress. It may very well be your most important strategic partnership. So give your banker the same priority and attention as your best customer. You do not want to have them become your worst supplier. If they are; then something needs to change.
Working with your bank as an unwilling and unwelcome partner can be a destructive distraction from managing business growth and profitability.
My recommendations for a more effective partnership with your banker are built on understanding the following key principles of that relationship:
1. They will not get it.
Start by accepting that your bankers will never fully understand what you do for a living - your motivation, your challenges or your circumstances. But you do have to try to get them to understand enough about you and your business operations so that they can be confident that working with you will be good for them.
Remember the bank's primary role is not to lend you money; it's to earn a return on their investment for their shareholders and limit the risk of losing money.
2. It's only for the money.
You will need to prove that the money is all you need; because you have looked after everything else.
The banker does not want to worry about your customers, your management team, your sales and marketing efforts, your operating efficiencies, your health, your marriage or anything else except the financial services you need.
3. They have a checklist.
When you meet and fill in the forms, remember the banker wants to be satisfied on these five criteria:
- Character – do you have a reputation of integrity and responsibility on prior financial obligations?
- Capital – do you have enough invested in your business to be personally at risk?
- Capacity – do you have good potential to support the cash flow requirements?
- Collateral – if you cannot repay your loans, what assets are available to cover them?
- Conditions – is your industry in good economic condition or in a downturn?
Good answers on these points will provide the start to a good relationship with a confident and willing partner instead of tentative support from a cautious and reluctant partner.
4. Reduce the risk.
You may be stimulated by risk and reward; your banker is not. Banking is a very conservative career choice. Regardless of how good you and your plans are, the banker will still want personal guarantees. That means he gets your house if you fail. (Note: I have never met a banker who found it amusing to suggest that you should get his house if you succeed.)
5. Think big.
The more you need, the more interested they'll be and you'll likely get better terms. (The only time I had no personal guarantees was when the loans were up to $4.8 million.) So, if you're starting small, be sure to describe your growth plans and your intention to build a strong, long-term banking relationship.
6. Get a second opinion.
Bankers love to win business away from other banks. That is good for their careers. (That’s how we got the $4.8 million with favourable terms.) So check out the competition anytime you need new financing or your current bank is not serving you well.
Just be sincere and be ready to change. One banker asked me directly, "If I meet all your requests will you move to my bank?" I said, "Yes". Then he delivered and so did we.
7. It's not a people business.
It's a numbers business and you cannot negotiate with a computer. That friendly, helpful person you're talking to does not make the decisions. Your numbers get fed into some obscure computer program and the answers (or more questions) pop out. They are not negotiable. A good banking relationship means that you will be told what numbers are required to get favourable answers.
8. Manage your numbers
Make sure your business plan computes and gives financial results that are attractive to lenders. Then manage the numbers to deliver the results and stay within the limits set by the bank. Read the fine print to be sure you don't miss any requirements to maintain financial ratios or any restrictions on payments to shareholders. Deliver financial reports as required, but also be sure to provide your own analysis and explanations before someone else does. You don't want that computer to set off the alarms.
9. No surprises, please.
Bad news is never well received, but the reaction will be much worse if it's also a surprise. And no news at all only makes them worry.
Keep your banker aware of what might go wrong and what you plan to do about it. Then keep them current as things evolve so they get used to your ever-changing circumstances and how you are handling them. (Hopefully, well.) Avoid going back with a new plan too soon or too often. And try to plan well ahead of any request for more financing. It is very hard to get the bank to help you out of a disaster when you’re in it.
10. People still matter.
The personal connection is still a very important part of a good relationship with your bank. Part of managing that relationship is to be sure that you are not entirely dependent on just one contact. If the relationship lasts, your contact person will change and you need to know someone else to maintain continuity of the relationship. Stay connected at several levels.
Your banking relationship needs to be strong to withstand the inevitable hard times that hit any business. A welcome and willing partner should help you weather those occasional storms.
I’m sure you have your own anecdotes of unsupportive bankers, but it is more important to get them onside with your other key strategic partners.
Your Uncle Ralph, Del Chatterson
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