Seven Steps for the Proper Care & Feeding of Your Banker
by Pat Burke
When your business is humming and the cash is rolling in, you likely give little thought to your banker. However, when times get tough or an expensive opportunity arises, you suddenly consider your banker a critical team member. This will come as no surprise, but you and your business are much better off if you constantly treat your banker as a critical jersey-wearing member of your squad. Here are seven basic principles for how today’s best business owners build and nurture winning relationships with their bankers.
Select a banker who fits your business profile and will add particular value with pertinent advice
You shouldn’t be either your banker’s largest or smallest account. If you are the largest account you may be educating your banker about his job and not just your business. If you are the smallest account, you will receive second-class service. You also may want to select a banker who is slightly older than you and will be able to add valuable real-world advice as you grow your business.
Borrow money from your banker when you don’t need it
For example, if you bought a machine a year ago for $20,000, the bank would have lent you 80% of the cost or $16,000. Now let’s assume one year later you need some money. The bank would probably lend you only $10,000 against that machine, and since now you need the money, your financial position may be weaker so you are borrowing at a higher rate. Follow the rule of using long-term debt to fund long-term assets and short-term debt to fund short-term assets. Remember cash is king!
Keep your banker informed
Share your budget and business plan with your banker and seek guidance on how the bank wants to participate in your growth. Tell your bankers when you see a slow period coming since bankers do not respond well to surprises. It is always important to remember that your loan is something that your banker is responsible for inside the bank. As a result, keeping them informed allows them to become your advocate.
Be loyal to your banker
Although it is fine to shop around in order to keep your banker on his or her toes, loyalty will be rewarded if you need some leeway when times get tough for your business. Many times I have seen bankers waive a bank covenant or two for long-time customers because they trust the customer will turn the business around and achieve the profitability necessary to service their loan commitment.
Don’t be afraid to use your banker as a reference
Your banker generally knows more about your finances than anyone (except your accountant). As a result, your bankers are generally happy to sing your praises to a potential new customer or business partner. In some instances, a partner in a business deal may even ask for a bank reference. In this case, it is very important you have maintained a strong relationship with your banker and his or her team.
Use your banker as a cheap form of due diligence and for sales leads
Bankers have seen how hundreds of companies have done it, both the right way and the wrong way. As a result, they have a wealth of local knowledge about which businesses you should be partnering with and those you should not. In addition, because of their deep community contacts, they can be a source for a mentor or a member of your company’s board.
Understand your banker’s job
Bankers lend money against collateral and cash flow to individuals of good character (the three c’s). Bankers do not fund start-ups. That is the job of the three f’s (family, friends and fools) or a venture capitalist who buys equity in your enterprise. Bankers never fund new ventures, even inside an existing business. The risk of these new business ventures is yours, but so is the return. Since bankers don’t share in the upside of a venture except to the extent that you borrow more money (and that’s their job: selling money) they likewise can’t share in the ultimate downside.
They must protect themselves, that’s also their job. Like all business relationships, your relationship with your banker is based on mutual trust, respect, benefit and maybe, over time, even friendship. Properly nurtured and informed, your banker can be a highly valuable ally and a significant contributor to your growth and success.