Every business will hit a rough patch at some point. A company’s momentum can be stunted by a number of factors including an unfavorable economic climate, the loss of a key customer, or disappointing results from a merger or expansion. Regardless of the cause, during trying times, it is important to maximize the relationship you have developed with your bank. By being candid and forthcoming about potential challenges, you put your banking partner in a position where it can proactively identify solutions to meet your needs.
“The ability to maintain a relationship with a financial institution during challenging times will save a company time and money,” says James Wade, first vice president of Comerica Bank.
Smart Business spoke with Wade about how to best maintain a relationship with one’s banker during challenging times, the importance of communication and how to plan an investment strategy during the midst of an economic downturn.
Why is it so important for businesses to maximize the relationship they have with their bank during challenging times?
Having a long-term trusting relationship with a bank’s decision-makers should provide you with a clear understanding of their expectations, which will allow your management to focus on operations versus interviewing alternate sources of financing. If you find yourself in a situation where your bank is not willing to understand your business, especially during challenging times, it may be time to find a new financial partner.
In what ways should companies work with their banker in advance of, and through, economic downturns?
A company needs to choose a financial institution that has a history of supporting its customers through cycles. Look for a bank and a team that has operated through multiple cycles. If this experience is part of the culture of the financial institution, it provides the confidence and patience to support a company through challenging times. Invest the time to develop a relationship with multiple decision-makers in your financial institution when times are good. This strategy will pay off when cycles change.
What role does communication play in sustaining a positive working relationship?
Communication is critical; no one likes surprises. A financial institution and banker deserving of your business will bend over backward to support your company through challenging times, assuming you have taken the time to communicate the good and bad, timely and accurately. A banker who trusts the information you are providing will have an easier time supporting your company during challenging times. However, remember that commercial banks are regulated institutions that have legal requirements and their role is not to fund long-term losses or other equity situations. Banks do have the flexibility to work through short-term problems and may ask for flexibility in return in the form of additional collateral.
How should a company communicate disappointing results to its banker?
Communicate as soon as possible and provide an action plan. Include monthly projections with your plan for a benchmark to operate against. The objective is to agree on a plan so you have the ability to operate your company without wondering how your bank will react. Meet often during these times and provide actual performance comparisons to your plan. If you deviate from the plan, meet with your banker to discuss what happened. It may be necessary to revise your plan if the environment you are operating in is changing.
In the event that a company loses a key customer, what strategy should be utilized?
A company should be diversifying from concentrations prior to losing a key customer. However, if a key customer is lost, the obvious and most conservative answer is to cut expenses to remain profitable at the lower volume. Your company becomes self-sustaining quickly and can implement a long-term plan to replace the lost revenue. Business owners are entrepreneurs and may want to invest to replace lost revenue quickly. This can be done through acquisitions of a company, technology or people. All have an element of risk. Plan ahead and, if possible, implement your plan before losing that key customer.
How should companies plan their investment strategy during the midst of an economic downturn?
A cyclical business that is affected by economic downturns needs to develop a strong balance sheet during the good times. This will provide a competitive advantage during challenging times. You may be able to acquire a competitor at a great price or increase your market share one customer at a time. Regardless of your specific strategy, the flexibility provided by having liquidity during uncertain times will prove beneficial. <<
JAMES WADE is first vice president of Comerica Bank’s San Diego Middle Market Group. Reach him at (619) 652-5778 or email@example.com.