The Story Matters
February 06, 2006
Case categories include: Finance
By Robert Sher
Most CEOs have a love-hate relationship with the notion of borrowing from the bank. Sometimes bankers are eager to loan and friendly. At other times, they are demanding, even aggressive in collecting money. The truth is that they are businesses themselves, looking for ways to make profits through money lending. Get used to it.
Banks partner with businesses as suppliers of cash only when they are convinced that it is a smart and profitable deal for them. When being your cash partner looks too risky, they run for the hills – and they should!
Rick Whitsell, President of Legacy Bank in Campbell, Calif., explains that it’s not so black and white. “Every bank loves making loans to ‘golden’ companies, but no commercial bank wants the high risk loans. But much of the profit for us comes from the loans we make in grey area situations, where it takes an understanding or the business beyond the financial statements to make a good decision.” So it’s the companies that are in the middle range, or “gray area,” where it’s critical to convince the bank that your business has very low risk.
Will they hear you?
All banks make a good show of listening to you. But only some banks – often the smaller, local ones, really hear what you have to say. Your goal is to work with someone senior enough at the bank that their opinion matters. Someone experienced enough to understand your business, and able to write their perceptions down in a credible form. You see, every loan a bank makes has a narrative in the file written by the bank, explaining why the loan is prudent. This gives life to the numbers. The bank’s auditors and the regulatory agencies will read that narrative. Making sure your story is told well in that narrative is critical.
The bank cares deeply about your ability to run your business well. It’s key to paying back the loan. What can you do to prove your business competency? Right from the start, show them that you are financially savvy; understand your own business as well as the nature of the banking relationship. Be forthright about your situation – and especially anything that they could discover on their own through analyzing the statements! Trying to hide something that they will discover on their own is a fast way to damage their trust in you or their faith in your competency.
Most bankers want to know everything about your business. Mr. Whitsell says, “It always works best when we have regular dialogue with our customers.” Yet most CEOs worry about unnecessarily spooking the bank. My advice is to share small issues and victories with them on a quarterly or bi-annual basis. If anything major happens, you probably need to share this with them as well. Keeping them updated shows that you are in control of your business, not vice-versa.
Knowing how bankable you are is always critical. And it’s not a yes or no. Some businesses are incredibly creditworthy – anyone would loan them money. Others are fairly bankable, and some are barely bankable. After the bank renews your line of credit each year, be sure to ask them their opinion of your firm’s creditworthiness versus where you stood a year ago. The idea is not to wait until the bank calls your loan to deal with eroding financials. You should solicit feedback from your bank so you can take action well before it’s too late.
Mr. Whitsell says, “When we have concerns, the first thing we do is to ask for more frequent reporting. It helps us catch issues before they are too late, and gives us time to act as a consultant to our customer, often restructuring debt or making other suggestions.” If your bank is concerned enough to ask for more frequent reporting, pay attention and figure out what you need to improve.
Banks rate every loan. Being rated “pass” means your loan is OK. But when you slip, the first downward rating is “Pass-watch”, then “sub-standard”, then “non-performing”, then “loss”. If you’re an existing borrower, they might renew you on a watch status, but if you’re substandard or below, they have already pulled your loan.
Keeping up a second banking relationship is a great idea. You may only have a few accounts there, or a minor credit facility. But any history with a bank is important. If your primary lender has issues with your loan, you’ll have second bank who already knows you – a big help if you need to switch lenders.
Realize that if your financial position is so poor that banks are afraid to loan you money, then no amount of talk, positioning, or anything else will help get the loan. So if borrowing money is what you know you need to do, run your business such that your financials will look solid from a bank’s perspective.
• Find a lender where competent, empowered people work with you.
• Make sure the bank knows your business’s story, and why your firm is successful.
• Know how confident your bank feels about your loan, and if their perception is changing for the worse.
Robert Sher is principal of CEO to CEO, specializing in assisting CEOs and business leaders as they navigate critical passages. He is the author of The Feel of the Deal; How I Built a Business through Acquisitions. He may be reached at Robert@ceotoceo.biz.
Company and Case Facts:
Company: Legacy Bank, N.A.
Person: Richard L. Whitsell, President and CEO
Alliance Member since: 2005
Business Founded: 2003
Head Count: 31 FTE
Service: Local business bank
Typical Customer: Mid-sized businesses up to $50 million in sales
Written: February, 2006
Address: Legacy Bank, N.A., 125 E. Campbell Ave., Campbell, CA 95008