The pillar of a solid relationship with a lender is honest communication on the part of the small business owner. Whether your business is struggling, or making money hand over fist, it's important that both situations be communicated to a lender.
Recently, I surveyed about a dozen senior, experienced lenders located in Massachusetts, New York, California, Texas, Florida, and Ohio1, on the importance of being honest with a lender in good times and bad. All lenders responded that it is very important to keep lenders apprised of your company's financial health, particularly when it is experiencing -- or is likely to face -- financial problems. Respondents felt that a lender's direct involvement can help a company overcome financial challenges; however, when a business owner conceals the truth, lenders felt they would be less inclined to cooperate -- and more apt to act adversely.
When your company is performing well financially, when it generates sufficient profits and cash flow, and when loan repayment is not threatened, you certainly can get away with some things without jeopardizing your loan relationship. A loan officer will note your behavior for future reference, but he or she most likely will not end the relationship because of it, especially if things have been going smoothly.
Several situations2, however, will raise red flags with your lender, and could cause him or her to re-evaluate your relationship with the bank. These include:
Any of the above behavior could warrant more aggressive action on the lender's part, including asking you to take your business elsewhere. However, many lenders can be assuaged if you're honest with them, thereby actively enlisting their help in resolving situations before they harm your business and your banking relationship.
Of course, being honest has its risks, but generally, its benefits can be far more helpful to your company.
Risks of being honest with lenders:
Benefits of being honest with lenders:
Yes, the risks involved with being honest could result in your damaging the relationship; however, the benefits of being honest could strengthen and establish a lending relationship that thrives today and finances your business's future.
1 The survey is confidential and does not disclose names of lenders or their companies as a condition of participation.
2 In certain situations, particularly such as possible bankruptcy or grave financial problems, I also suggest contacting a lawyer and a financial adviser to develop a strategy that suits you and your company.