Emerging and established businesses face the same challenges when it comes to establishing and maintaining a positive relationship with their banker.
After speaking with several local bank executives, I have identified 10 rules for maintaining a positive relationship with your banker. They are as follows:
1. Meet with your banker at least once a year to review business trends and financial needs. Your banker will get nervous if they are not kept appraised of your sales, profits, and accounts receivable levels. You should increase the frequency of meetings when the business is soft or declining. The frequency of meetings should be at least quarterly to prevent the bank from reducing the line of credit or calling the business loan because they become unsure of the viability of your business. It is important to get acquainted with other officers at the bank, and they with your management, to add continuity to the relationship.
2. Arrange for site visits to educate and orientate your banker to the specifics of your business. Your banker can also be your business advisor. The more they know about your business, its processes and its customers, the more the bank can assist you in growing your business. In addition, your banker will have the opportunity to meet your management team.
3. Establish a relationship with an attorney and an accountant to help you select the proper type of legal entity for your business and to provide financial analysis. Your attorney can assist you in determining the best legal entity for your business. Depending on the size, age and nature of your business, the entity could be a simple LLC, LLP an ‘S’ Corp or a ‘C’ Corp. Your accountant will provide you with the level of financial analysis needed to maintain your credit line, mortgage or business loan. Many small businesses are reluctant to spend money on such consultancy services and prefer to use software packages to produce basic financial information. Your accountant will analyze the age of your account receivables, the value of your inventory and the true cost of your processes. He or she will also assist you in putting your financial information in a format that is generally accepted by your banker.
4. If you have a board of directors, you should have at least one outside director who provides an objective opinion. Banks are more comfortable with a business that has one or more objective outside opinions on their board. This avoids the potential for groupthink on the board. Banks are concerned with the level and competency of governance of a company’s board of directors.
5. Be willing to pledge personal assets and/or a personal guarantee to cover business loans when assets have eroded. Many banks feel more comfortable with extending a line of credit to your business if you can pledge some personal assets or sign a personal guarantee. When you are reluctant to personally guarantee the line of credit, the bank is not willing to carry the risk by itself.
6. Expect to keep the depository accounts where your business loans originate. Your banker feels more comfortable when you maintain your business accounts at their bank. You should keep your deposits and your business checking at the bank that provides you with your business loan or credit line. Again, this gives the bank a higher level of comfort with the relationship.
7. Be sure to provide adequate insurance to cover assets, key managers etc. Obtaining key manager insurance for the business provides for an influx of capital that would assist in the buy out of a partner’s interest in the business without negatively affecting the company’s bottom line. It is also critical to protect your physical assets, your building, equipment and inventory from fire, water and theft. Banks would like to see you review your insurance levels on an annual basis to ensure they provide the proper level of coverage.
8. Involve your banker in major financial decisions, such as leasing or purchasing equipment, or expansion of your business. Your banker can assist you in choosing the best method to finance the purchase of new equipment, to acquire a new location or to expand your inventory levels.
9. Deal with a financial institution that can provide the level of service and capitalization necessary to grow your business. You need to choose a bank that can grow with you and continue to provide you with the level of capital you will need to fuel that growth. Too often, small businesses outgrow their bank and need to find a new financial institution to provide the services they require.
10. Be prepared to provide the banker with an updated business plan complete with financial projections. When you began your relationship with your bank, you sat down and shared your business plan with them. If it’s time to renew your credit line or request a loan and your business plan has not been updated, then you need to sit down with your accountant and your business consultant to update your plan and the supporting financial statements. You also need to demonstrate that you have achieved the financial goals that where set out in your initial business plan. Your company’s financial track record is your best argument for an extension of your credit line or a loan to expand or open a new location.
Following these 10 rules will aid you in maintaining a positive relationship with your financial institution. Too often, by not maintaining open communication with your bank, the relationship is put at risk. Having the bank involved in your business is a good long-term strategy. Remember, it is a partnership. You are playing the game of business with their money, so they have a major stake in that game.
Cary Silverstein, MBA, is the president
and CEO of Fox Point-based Strategic Management Associates LLC. He can be reached at (414) 352-5140.
July 22, 2005, Small Business Times, Milwaukee, WI
