Street Smarts

They may be the worst salespeople in creation, but every business needs one

I never thought I'd be using this column to tout the virtues of the banking industry, but a recent question from an Inc. 500 CEO got me thinking about the importance of building a relationship with a bank.

The CEO said he needed a line of credit to finance his company's expansion. He planned to borrow against his accounts receivable. His chief financial officer wanted to use a bank, but his accountant was recommending that he go with an asset-based lender. He said he wasn't happy with his current bank and was planning to leave it anyway. Was there any reason he shouldn't use an asset-based lender for the credit line?

I told him I could think of about 10 reasons. How many did he want?

Listen, I know how difficult bankers can be to deal with. I've had my full share of run-ins with them. It's amazing how poorly they sometimes treat their customers, and how hard you have to work to get them to take you on in the first place. As a group, they are just about the most inept salespeople I've ever run into.

But every business needs a bank, and you should use every opportunity you have to build a relationship with one. Forget about whether or not you need a loan right now. The truth is, you're better off if you don't. What's important is to have the relationship. Why? Because the day will come when you do have to borrow money, and when it does, you don't want your only option to be an asset-based lender.

Please don't get me wrong here. I have nothing against asset-based lenders per se. They play an important role in our economy, lending money to companies that can't get it anywhere else.

And unlike bankers, they're terrific salespeople. Yes, as they will readily admit, it's more expensive to borrow from them than from a bank, but they do so much more for you (or so they claim): monitor your collections, do credit checks on your customers, help you keep on top of your receivables. What's more, they can close a deal quickly and painlessly, in as little as two weeks, often without even requiring audited financial statements.

It can all look very tempting to a growing company with little cash and a lot of receivables, especially if you're coming off a bad experience with a bank. There's a catch, however. A loan from an asset-based lender is not the same as a loan from a bank. (By "bank," I mean a traditional commercial lender. For the purposes of this discussion, I'm including the asset-based-lending divisions of banks with asset-based lenders.) The key difference can be summed up in one word: control.

When you borrow from an asset-based lender, you give up control of your receivables. The payments from customers no longer come to you. They go into a lockbox at the lender's bank. You get copies of the checks and a full accounting record of what happens to the money, but the lender controls the cash. If a dispute arises, or if your business gets into trouble, the lender holds all the cards. While it no doubt would prefer that your company succeed, it has no great incentive to help you get through tough times. After all, it isn't depending on you to repay the debt, it's depending on your customers. That's why asset-based lenders seldom insist that you provide them with audited financial statements. It's your customers' creditworthiness that counts, not yours.