Keep Lender Informed of Good, Bad Issues to Build Strong Relationship
What’s involved in the care and feeding of a lender?
It has a great deal to do with the critical issues your business faces--the things that must go right if you are to succeed, and may sink you if they go wrong--and with the temptation to keep things to yourself.
Bankers are happiest when you deal with them as you deal with such professional advisors as your attorney or your accountant, keeping them informed of the good, the bad and the ugly not as it happens but before. They don’t mind bad news so much as they hate surprises, which make them fear that worse is to come.
That is easier said than done, of course. For one thing, it’s hard to see trouble before it strikes. For another, you need a loan officer willing to take the time to learn about your business--hard to do when he or she earns commissions.
Last but not least, you must discipline yourself not to play your cards close to the chest when discussing your dreams.
“We always want to know: Is there anything we don’t know that we should know?” says Harry “Duke” Chenoweth, executive vice president of Imperial Bank. “When business owners have concerns that they don’t bring to the surface with a lender in the hope that the lender doesn’t find out, they risk the credibility that is essential to the relationship, and maybe even the relationship itself.”
The key, Chenoweth says, is to keep your lender abreast of your good and bad news alike--even your very bad news, however painful it may be.
The business borrower who does this gains control of the relationship and so stands in good position to use debt capital for growth, Chenoweth says. Debt capital is cheaper than equity capital in the sense that it imposes on you only the obligation to pay it back with interest. Equity capital--that is, capital injected into your company in exchange for an ownership interest in your stock--dilutes your ownership and may saddle you with a partner who does not share your goals.
In addition, if you run a “not-com” business--for example, a small factory, a wholesale operation or a distributorship--debt capital is often the only outside capital available to you, for all practical purposes. These days lenders of all kinds compete eagerly to lend to such businesses, offering a wide variety of products and services that can prove useful to the business owner. But you must position yourself to take advantage of the opportunity.
“You have to tell your banker what your critical issues are,” Chenoweth says. “You have to explain what must go right--and there’s always something that has to go right even in a business going full tilt. If you do a good job of educating your lender about the nature of your business, you get a special plus when you need additional help. If you give your lender nothing but surprises, you get knee-jerk reactions.”
Brian Carlson, an Imperial Bank senior vice president and general manager of its small-business lending division, cites the example of the business owner who, without informing the lender, buys capital equipment with working capital, dipping into a revolving line of credit.
“It’s a common mistake,” Carlson says. “You think you can use the profits generated by the equipment to pay down the line of credit. But then you get more orders and you don’t have enough working capital to fill them.”
The better idea, Carlson says, is to consult your lender before you buy the capital equipment in the first place, probing your need and your resources to make sure that your capital structure remains rational. This means using a working capital loan for short-term, not for long-term, expenditures.
“Different loans are for different purposes,” Carlson says. “You’d be surprised how many business owners don’t understand this.”
Business owners should manage their banking relationship in the same way they manage the challenge of finding new customers, Chenoweth says.
“It’s a marketing job, and if you take the time to educate your lender about your business, then when you find yourself up against an immediate need, your lender can help you meet it,” he says. “The banking business has changed a lot in the last 20 years. It used to be that the banker sat at a desk and waited for clients to come in. Now lenders are out knocking on doors all day long.
“But banks have their own limitations. If your borrowing needs are going to be $1 million, don’t expect a lot of focus from a big bank. Lenders all say they’re relationship-oriented and they want to get to know you. You have to think your way through all that.”
Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.
