In these challenging times, it pays to be as prepared as possible. Here are some suggestions from the banker's side of the desk that will help increase your chances of success when it comes time to renew or renegotiate your current loan structure.
First, it's no secret that the banking industry has taken a hit over the past 48 months. Bank performance (or lack thereof) has been front-page news for some time. Here's an overview of what's happened, where we are, and what it means to you.
A generally robust economy since 2003 lulled banks into more of a "sales" mentality and less of a "credit analysis" mentality. As a result, credit standards were lowered, documentation pared down, and the loan decision process watered down. Not by every bank, mind you, but by enough. The result? An accident waiting to happen. The economic meltdown may have been caused by bad lending. However, the ripple effect (some would say tidal wave) has now affected most banking entities.
What does this mean to you? Simple: the sales guys are out, and the credit guys are in. Period. More documentation, more scrutiny, less leverage, more collateral. The "lending circle" has been tightened. So it's not rocket science what it means to you: just like any good Boy Scout, be prepared. Here's how.
Stay in touch with your banker. Bankers don't like surprises. Even if you don't like the results, share your financial statements with them on a timely basis. Don't wait until they come to you. "Make sure you share all the news with your banker: the good, the bad, the ugly," says Bob Stewart, senior vice president for the Center for Commercial Banking at the American Bankers Association. You have a partner relationship with your banker. You wouldn't keep your other partners in the dark, would you?
Don't kid yourself (or your banker). Your banker sees a lot of businesses in all industries. He might bank your competitors and probably read the national statistics. Be up front about the state of your industry and how your company stacks up.
Know your numbers. Know your past trends, current situation, and put together the most realistic cash flow projection possible. Show your banker that you know what the real situation is so he doesn't have to spend time and energy bringing you back to reality.
Have a plan. Show that you have a plan to deal with the situation and have a strong handle on cash flow, especially if you are asking for an increase to your credit line or an extension on paying it back. If you were a banker, who would you rather work with: an owner who pretends that everything's okay when it isn't, or someone who is facing the situation head on, taking active steps to address it, and has a plan going forward?
About credit lines. There are two types of credit lines. One is a contractual line of credit, which the bank is obligated to maintain. These usually come with an up-front fee. The other is a guidance line of credit, which the bank is not obligated to maintain. In a guidance line letter, you'll see words like, "terms that are mutually agreeable to both parties," and "subject to review from time to time." Stewart suggests that if you received one of these letters a year or so ago, "You should talk to your banker and ask him point blank if this money is there for you if you need it tomorrow."
Then have a Plan B. If you're not comfortable with your banker's answer, shop around. We heard about a jewelry store owner who had banked with the same institution for more than 10 years. His loan officer informed him that the bank had recently tightened its lending policies to retailers, which resulted in an extremely unattractive renewal offer. He was able to find another bank that was happy to have him as a new customer and offered much better rates and terms.
Don't go it alone. Even those who are good with numbers can benefit from input and advice. People to ask? Your CPA is a good source, as is the network of Small Business Development Centers (SBDCs). They offer skilled counseling at no charge to business owners. To find one in your area, go to your favorite search engine and type in "SBDC," followed by your state name.
Reach out and communicate with your banker, your vendors, your management team, and your advisors. Get advice and input. Then make a plan and take action. We all need to be thinking of these post-recession times as a process and not a single event. In turn, your ongoing response will be in the form of a continual series of actions and adjustments to your plan.
Steve LeFever is the founder and chair of Business Resource Services (BRS), a Seattle-based consulting firm that provides financial management education, network benchmarking, performance group facilitation, and bookkeeping services for closely held businesses under its Profit Mastery brand. Learn more at www.profitmastery.net, or contact him at 800-488-3520 x14 or firstname.lastname@example.org.
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