Worried about your credit line? You may need a better relationship with your banker.
Perhaps you're not especially enamored of your banker right now. About 70 percent of banks recently tightened their standards on loans to companies with less than $50 million in annual sales, according to a survey by the Federal Reserve, and more than 40 percent of the banks reported reducing credit lines for their small-business customers.
Unfortunately, no business can afford a rift with its banker -- especially in tough times like these. In fact, this is precisely the time to give your lender some special attention. "If you work on building a relationship, then, in the event that there is a bump in the road, you can approach it from a position of familiarity and understanding," says Michael Sheridan, a vice president of commercial finance at People's United Bank, headquartered in Bridgeport, Connecticut. Here are some ways to make nice with your bank.
Jamey Bennett, CEO of LightWedge, a Nantucket, Massachusetts -- based manufacturer of reading lights, has been banking with People's United and dealing with Sheridan since 2007. Prior to teaming up with Sheridan, Bennett had been relying on a $200,000 home equity line of credit. He turned to People's United for a larger credit line backed by the company's receivables and inventory. Bennett sends Sheridan monthly financial statements and makes it a point to chat with him at least once a quarter. Upon learning that an episode of Oprah featuring his company's products was about to air, for example, he immediately phoned Sheridan. "Things like that help keep the company on my radar," says Sheridan. Bennett also contacted Sheridan after deciding to replace his CFO in October. "I don't think anybody likes surprises, especially your banker," says Bennett. "If something material to the business changes significantly, I keep Michael abreast of it. I need him as a partner in what we're doing today and what I expect to be doing tomorrow." Scheduling a quarterly meeting with your banker is a good idea, even if you think there is nothing to talk about. Says Sheridan: "There's always something to talk about."
Sharing good news is easy, but entrepreneurs tend to clam up when it comes to the more negative stuff. "If your business is experiencing problems, you need to talk to your banker about it," says Lauch McKinnon, president and CEO of Atlanta-based RockBridge Commercial Bank. "The thing that bankers hate is to have borrowers who have gone dark on them. Our interest is to see companies survive and prosper. Companies that stay in business tend to pay you back, and that's our goal; we want to get paid back." McKinnon recommends delivering poor financials in person. "That will give you the opportunity to talk the situation over," he says.
Recently, for example, LightWedge had to deliver some bad news to Sheridan. "Right now, we're feeling pretty good about where we are in respect to managing our cash, but some of our customers are not in such good shape," says Bennett. "We've got one of our biggest customers looking very, very sick right now." After discussing the situation, Sheridan suggested Bennett get credit insurance. It was a win-win: Now, LightWedge is protected against the possible loss of a large receivable, and People's United Bank is protected against that credit risk. "Some customers have had a bad experience with a bank, or they have an old-fashioned view that you don't want to tell the bank too much," says Sheridan. "That's the sort of thing that can often result in a bad surprise." Besides, if your financials are in bad shape, the banks will find out anyway.
Sending financial statements on time every month goes a long way toward building trust between a company and its bank -- especially now that bankers are under increased scrutiny from both internal and external auditors. Companies should also make sure they comply with financial covenants, the fine-print terms of loans. These covenants often require companies to maintain certain minimum financial ratios -- they often focus on debt-service coverage ratio, which weighs a company's operating income against its debt payments. "If a business has financial covenants in its loan agreement, it should be very careful to maintain them," says Scott Wallace, managing partner of Tempe, Arizona—based accounting firm Wallace, Plese + Dreher. "There is going to be less tolerance from the bank for covenant violations than ever before. In good times, banks tended to waive those. In bad times, I'm not so sure they will." Depending on the bank, that could mean getting hit with service fees of up to $5,000 or possibly having the loan called.
Building any kind of relationship becomes more difficult when the other party refuses to take your calls. That's what led Daniel Yates, owner of Portland Spirit, a Portland, Oregon—based dinner cruise line, to switch banks. "When we had questions, no one would even return our calls," says Yates. "It was very impersonal. That's when we started looking for a smaller bank." Smaller regional and community banks typically offer more personalized service and more direct access to key decision makers than the large national banks. And thanks to less exposure to the subprime mortgage mess than many of the larger national banks, smaller banks may be in a better position to lend to entrepreneurs. Yates eventually landed at Umpqua Bank, an Oregon-based bank, which gave Portland Spirit a $3 million loan last year. Yates says he has business, home, and cell phone numbers for Matt Stanley, his commercial banking officer, and speaks with him every couple of weeks. "They know us, and they have taken the time to understand all the ins and outs of our business," says Yates. "That certainly wouldn't have happened at a large institutional bank."
Most companies hope to continue unfazed through this rocky economy, but any banker will want to know that you are ready for possible pitfalls. "Companies should be as anticipatory as possible," says McKinnon. "Look out to 2010 and say, 'What's the worst that could happen to my business given the state of the economy?' It gives a banker comfort to know that they are prepared to act if they see adverse conditions starting to occur."
Staff editor KASEY WEHRUM has written for Inc. magazine on subjects ranging from the businesses behind professional bull riding to gadget inventor and father of the infomercial, Ron Popeil. His work has appeared in the New York Times, Worth, Budget Travel, and on MSNBC.com. He lives in Brooklyn.