Sometimes an idea for a monthly column is like accidentally finding a gold nugget under your pillow.
That’s how I feel this month. First, I want to thank Atlanta Vistage member Lee Katz, CEO of The Turnaround Authority, for his insight on what he terms the “CEO’s 10 Cs of corporate borrowing.”
To present his 10 Cs, I called five Wisconsin bank CEOs, all TEC members, for their input on this subject. I’m indebted to Bob Atwell of Nicolet National Bank in Green Bay, Greg Dombrowski of Johnson Bank in Madison, Mark Furlong of M&I Bank in Milwaukee, Peter Prickett of First National Bank of Fox Valley in Neenah, and Dave Werner of Park Bank in Milwaukee.
Here are the Ten Commandments:
1. Character is of the utmost importance to bankers.
Dombrowski gave an example of two clients who became seriously overextended with a real estate commitment. To generate cash, they downsized by selling homes and other recreational assets. When a tough decision was necessary, they stepped up to the plate.
In other words, your banker needs to know that when you’re in distress, the bank can count on you to do what is right. Demonstrating character is always more difficult when things aren’t going well.
2. Carelessness is caused by poor record-keeping
Prickett says that every problem loan has characteristics of complacency. Atwell mentioned that banks are not getting any slack these days from regulators. One solution is to always make sure that the issues on the table are, in fact, the real issues that need to be addressed.
In a way, this really boils down to good housekeeping, which means accurate financial record-keeping. Without safeguards, needless loan write-offs can lead to a bank losing federal loan insurance such as SBA Guarantees.
3. Complacency is not an asset.
All five CEOs said this is an implied offshoot of the Second Commandment, and Werner added that “we can deal what we know, not with what we don’t know.”
I remember that in the early seventies, it seemed fashionable to tell your banker the absolute minimum required to be legal and proper in your relationship with them.
Nothing could be farther from the truth today. The more you update them on changes in your business, the less likely they are to be surprised by the unexpected. As Katz points out, “This is all a part of the larger principle of being proactive rather than reactive with your banker.
4. If something happens to you, contingency plans are key for orderly succession.
Business owners may be inclined to think that they’re invincible, but history speaks otherwise. Furlong agreed. Prickett added that when it comes to stability, this is a two-way street. What’s true for the business owner is true for the banker.
I’ve written before about “letters of instruction.” The CEO writes a detailed letter about how the company should be managed immediately upon death or disability, including who the interim successor should be. You should introduce your banker to your management team at some point.
5. Capital is your net worth (assets minus liabilities).
The key objective here is to show your banker that you are “capital-wise.” Katz, perhaps, said it best when he remarked that “telling entrepreneurs, owners and CEOs to keep extra capital around is like telling a dog to save part of his dinner for later.”
Atwell said that communicating with your banker about your capital situation is very important. Dombrowski adds that clients will sometimes confuse bank debt with equity. The bottom line is, of course, risk. The higher the infused debt in a business, the higher the risk and, therefore, the higher the rate the customer will be required to accept.
6. Collateral is a bank’s leverage and makes bankers feel more comfortable.
Most CEOs agreed that personal guarantees are a must in loans to owner-managed businesses, especially where there’s a question about the quality of balance sheet management. Furlong suggested that “sensitivity” tests may be more valuable than personal guarantees—that is, the impact on the business if a major account disappeared.
Collateral, Prickett says, is really a secondary source of repayment. Others noted that the liquidity of collateral isn’t a given either. One way to avoid any problems with collateral, Atwell mused, is to avoid substandard credit situations altogether.
7. Capacity is your ability to repay.
Katz says, “Bankers check to see if you have champagne tastes but a beer wallet.” Atwell said it’s akin to comparing the lifestyle of the owner to the performance of the business. In today’s world, following massive large institutional defaults, coupled with historic foreclosure rates, the customer’s loan repayment capacity is now very critical to the lending decision.
8. Competition can work to the borrower’s advantage.
Once upon a time, the catch phrase “shopping your bank” described how a business would look for the best deal in town. I believe that today, most business owners and banks would agree that the relationship between the lender and the borrower is of utmost importance. It gets back to the issue of developing trust and proving one’s character.
However, as is true in any business environment, it pays to know about your bank’s competitive position which, by the way, goes far beyond the price of the credit relationship, as Prickett noted, to other value sources and servicing capabilities that the bank has to offer.
It’s also possible that with bank consolidations or geographical contractions such as moving out of state, for example, having other sources of capital is in your best interest. Dombrowski also said that as a business grows, it makes sense to do business with more than one bank. For example, have deposit accounts with one bank and 401K accounts with another.
Furlong suggested that banks can partner with one another, once a business reaches a size that makes it beneficial to everyone. Others said there are no hard rules on partnering, or when to do so.
9. Controls are your built-in monitors.
This is largely a matter of checks and balances. And it has much to do with your personnel who are in a position to affect financial outcomes—controllers, CFOs, and inventory and purchasing managers. Prickett remarked that this issue of control is a clear offshoot of the carelessness concern mentioned in Number 2 above.
Werner said that if you follow proper business procedures and protocol, you will stay out of trouble. Regulated business must follow strict templates, and when irregularities do occur, it’s usually not by accident.
In TEC, we talk frequently about key performance indicators, or KPIs. If these are monitored monthly, and shared with your bank, you can spot undesirable trends quickly, and do what’s necessary.
10. Communication is essential.
“Deal with the knowns, not the unknowns,” Werner said, adding that it took “constitutional fortitude” to deal with the uncertainties associated with the last recession. Knowing where your business is positioned given current economic conditions, and acting accordingly by keeping your banker informed, makes basic business sense.
Prickett said that it behooves a business to understand that the bank is a lender, not an equity investor, for a business. This sharply differentiates the type of communication the banker needs versus what’s required by an equity investor.
Dombrowski stressed the value of strong relationships between the bank and its business clients. He recommends bank updates at least once quarterly.
Werner discussed the importance of the business client really getting to know the bank. That includes sharing your own expectations about what you need from the bank. He also believes that banks routinely go out on a limb for customers during difficult times. The better the quality of communication between the bank and the customer, the more likely that neither will be taken for granted.
Share your financial and cash flow situation, Werner says. Being articulate, definitive and accurate simplifies the business side of the bank-client communication relationship.
Here’s a good exercise for you. The next time you sit down with your banker, rate yourself on these 10 Commandments on a scale of 1 to 5 (1 – poor; 5 – outstanding). Ask your banker to similarly rank you.
Compare outcomes. I bet your relationship will grow to a new level. Until next month, let the 10 Cs work for you, and for your bank!