Surviving an economic downturn often hinges on a business owner’s ability to secure a commercial loan modification or expanded line of credit, but your chances of success dramatically diminish when you present your case to a veritable stranger. History shows that a banker is more likely to decline your request if he’s unfamiliar with the fundamentals or seasonality of your business or is unsure of your management capabilities.
Instead of waiting to share vital information and build trust with their banking partner, savvy executives act proactively so they can rely on established relationships to weather an economic storm.
“Open communication builds trust, which is valuable in good times and bad,” says Peter Koh, senior vice president and deputy chief credit officer for Wilshire State Bank. “Because trust is the foundation for all banking decisions.”
Smart Business spoke with Koh about the benefits of building a mutually beneficial relationship with your bank.
What characterizes a productive banking relationship?
A good relationship is characterized by an open dialogue and frequent communications, so a banker becomes familiar with your business model and needs. For example, unless you offer a detailed explanation, a banker may decline your loan application if he doesn’t understand that a seasonal downturn is impacting your financials. And unless you take the time to provide adequate documentation and a narrative to support your sales forecast, a banker may conclude that your growth assumptions are a bit too optimistic. Conveying the nuances of your industry and its cycles also helps your banker suggest appropriate services and solutions based upon his experience in the broader market. Remember, bankers have interdependent relationships with their clients, so both parties have a vested interest in mutual success.
How does a banking relationship benefit business owners and executives?
A banker is more inclined to entertain your request for a new loan or modification if he has a deeper understanding of your business fundamentals. And if the business owner has historically met his or her financial obligations and documentation requirements on a timely basis, a banker will be inclined to act quickly on any request. Essentially every banking decision is based on a combination of facts and intangible factors, and a solid working relationship can sway a close decision. It may be natural to avoid contact with your banker when times are tough, but you should view adversity as a call to action. Proactively explain your situation and offer an action plan or an alternate view of your company’s performance so both parties can focus on solutions instead of problems.
What criteria should a business owner consider to identify a suitable banking partner?
Certainly service levels and a bank’s offerings are important, but the decision really comes down to your comfort level with the staff and the banker’s knowledge of your industry and the local marketplace. Historically, community banks have catered to local businesses because their smaller size provides business owners and executives with greater access to loan officers all the way up to the CEO. Plus, your loan application doesn’t necessarily have to be approved by an executive in another city who doesn’t understand the nuances of the local marketplace. And smaller banks tend to be more flexible and less regimented than their larger competitors, so they’re willing to tailor a package of products and services around your specific needs. Evaluate your current banking relationship and upcoming needs so you can create a wish list to help you evaluate several contenders, but don’t overlook the intangibles that create a mutually beneficial relationship.
What are the keys to building a productive working relationship?
Follow these best practices to build a productive working relationship with your banker.
- Be transparent. Turn your loan officer into your secret advocate by supplying copious data as well as industry reports and trade group information, so he has the knowledge and confidence to lobby bank executives on your behalf when you submit a loan application or request for a modification.
- Be open. Invite your banker to visit your company, see the property or attend industry trade shows, so they have first hand knowledge of your operation and critical business fundamentals.
- Be resourceful. Turn to your banker when you need ideas to grow your business or overcome adversity, because this person meets with owners and deals with these problems every day. In fact, your banker is an excellent source for vendors or other experts who can help you write a business plan or even streamline operations.
- Be prepared. Anticipate your banker’s requests and come to meetings with a well-thought-out plan that specifically addresses his or her critical questions. Your banker wants to know how you intend to increase rents by 20 percent when the market is falling or how you plan to acquire new tenants when local occupancy rates have been trending down, so anticipate and be prepared to answer how-to questions.
- Be consistent. Provide your banker with quarterly updates that compare your company’s performance to your business plan, an updated forecast and feedback on the bank’s products and services.
- Be honest and proactive. Approach your banker before a problem occurs, because it’s much easier to boost revenue and profits than to rebuild a broken relationship or lost trust.
Peter Koh is a senior vice president and deputy chief credit officer for Wilshire State Bank. Reach him at [email protected]