Building a relationship you can bank on
Mark Twain once wrote: “A banker is a fellow who lends you his umbrella when the sun is shining and wants it back when it starts to rain.”
Unfortunately, Twain may have had a point about how some entrepreneurs see their bankers. Small-business owners often view their bankers as their adversaries rather than their advocates, but the fact is that your relationship with your local bank is among the most critical for your business success. Just because the loan is closed and you’re making problem-free, regular payments doesn’t mean that you can neglect the relationship. In fact, that’s when you should work to keep communication open. Proper relationship management is critical to keeping you and your business in a position to gain assistance from your banker when it is needed the most.
Today’s financial conditions are a perfect example.
Banks continue to struggle to maintain their identities—and their profitability—in the financial marketplace. Diversification, mergers and acquisitions have forever changed the banking landscape. Do not be surprised to find your lender working for one bank this month, a different one next month and yet a another six months later. Turnover of lending staff seems to be at an all-time high. And while it’s a topic of some debate, credit scoring has taken much of the decision-making out of the hands of local lenders.
Another huge factor is the current mortgage crisis. While it’s devastating to families, individuals and communities, among those suffering collateral damage in the midst of the current instabilities are small businesses, which are finding it harder and harder to collect payments and balance cash flow. Apparently, consumers are prioritizing bill payments—paying mortgages first and postponing credit card, utility, health-care and local small-businesses payments into delinquency.
The uncertainty and doubt created by the current lending crisis have caused banks to tighten lending standards in all sectors, including commercial loans, dramatically affecting small firms’ access to capital at the same time those firms are experiencing slow—and sometimes nonexistent—receivables.
Some of the pain comes from the fact that small businesses rely disproportionately on personal sources of financing for both startup and day-to-day operational costs. In fact, a survey conducted in 2007 by the National Small Business Association reveals that more than 40 percent of entrepreneurs use credit cards as their primary sources of outside financing. Bank loans are reported by 29 percent, and 22 percent of respondents include private loans as sources of financing. More than 70 percent are carrying credit card balances, and 53 percent of those report that their credit card terms have gotten tighter in the last five years.
All of these conditions have caused business owners to curb plans for future expansion; only 29 percent of entrepreneurs predicted growth in 2007, compared to 62 percent in 2000.
Because consumers are postponing bill payments, more small companies are forced to use credit cards to finance maintenance, upkeep, expansions and inventory. When they, in turn, must postpone payments or make only minimum payments, interest costs have a dramatic impact on the balance sheet, putting many small companies at risk.
All of this adds up to the need to stay on good terms with your lender. Here are some tips:
Establish a personal relationship. The old axiom holds true. People do business with people they know. Invite the banker to your business, and make sure he or she understands how your business functions. Let your banker feel and touch your business. Point out how certain aspects of your business operations affect your cash flow and capital needs. Treat the banker like you would treat one of your best customers. Familiarity builds trust.
Impress with financials and knowledge. Provide your banker with regular, properly prepared financial statements. Discuss these with the lender to make sure he or she interprets them correctly and is aware that you are reviewing such information regularly and have a good idea of what it shows you about your business. Typically, a quarterly visit with your banker when your business is doing well is appropriate, and if your business is experiencing cash flow problems, you may want to visit more often.
Make your lender aware of problems early. If you anticipate missing payments or needing additional capital, let your lender know as quickly as possible. Keep your lender informed about critical issues affecting your business. Problems tend to expand when not addressed quickly, and bankers hate surprises. If you explain your situation and your future prospects for repayment, you may receive a positive reaction from the lender.
The foundation of your banking relationships is built on the premise that you need the banker and your banker needs you. The banking industry and the small-business lending environment are changing radically, and you as a borrower can prosper by taking a proactive approach to your relationship with your lender and developing it as one of your most important business alliances. v
Virginia Wilson is a Small Business Development Centers counselor with the University Center for Innovation and Entrepreneurship at the University of Missouri.