External financing is typically the lifeline of a company, enabling it access to capital to purchase property and equipment, hire employees, and ultimately expand the business.
Commercial lending institutions provide the most common source of such financing.
“In order to get the most out of your lender relationship, the business owner or manager needs to understand what’s important to the commercial banker,” says Mark G. Metzler, CPA, director of Audit & Accounting at Kreischer Miller.
Smart Business spoke with Metzler about establishing a relationship with a commercial lender that will benefit your business.
What does a commercial lender look for in a banking relationship?
First and foremost, like most companies, the commercial lender is in business to generate a profit. Consequently, it’s imperative that the lender has confidence in the borrower’s ability to repay its loan. Therefore, in addition to evaluating the integrity of management, the commercial lender will look for a strong balance sheet and positive cash flow as indicators of the company’s ability to repay its obligations.
What else is important to the lender?
Lenders look at the experience and strength of management. In particular, they evaluate management’s ability to guide the company and execute its strategy. How has management been able to navigate through the recent turbulent economic environment? What are the backgrounds of the CFO and senior management? The lender will look at the company’s other business advisers, including its outside CPAs and attorneys, to help assess the company’s credentials. Does management surround itself with the right professionals? Lastly, the lender is interested in timely, open communication with management, sharing both good and bad news. The lender understands that projections and forecasts may change, but they don’t want to be surprised. The lender wants to know: What is management’s business plan, how has it historically performed and what are the key assumptions in the plan?
What should the business owner look for?
There are many options available to companies, and the business owner needs to evaluate a number of factors. First, who will be the company’s relationship manager and what is his or her experience? Remember, the relationship manager will be the one who presents the company’s case for extending the loan to the bank’s credit committee and monitors the company’s performance. The relationship manager plays a critical part and he or she should understand your business, its opportunities and threats, and potential capital requirements. Second, what type of financing is most appropriate? Options include traditional term debt, lines of credit, asset-based arrangements and SBA loans, among others. The size of the requested credit facility may help dictate the type of loan and banks that are suitable. Third, are there other services that you may need from the bank? For instance, if you have a global business, the bank’s foreign exchange capabilities may be important. Another business may be interested in cash management. Finally, because the company is often the business owner’s greatest asset, what private banking services are available to the owner individually?
What role do interest rates play?
Terms and conditions are always important, but we’ve found that commercial banks will be competitive for the right credit. Depending on the size and type of loan, the lender may be interested in collateral or personal guarantees. Obviously, companies with the strongest balance sheets and cash flows will generally obtain the best terms. While the lowest interest rate may appear to be most desirable, the experience of the relationship manager, the depth of service offerings and the commitment of the bank to your business are intangible factors that should not be ignored.
Do you have any recommendations?
Because your CPA works with a number of companies and has access to credit arrangements offered by various lending institutions, he or she is ideally positioned to guide you through the process and assist you in negotiating an optimal lending relationship for your company.
Mark G. Metzler, CPA, is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or email@example.com.
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Establishing a good relationship with your banker is beneficial to your business because a bank can be a source of ideas to improve your company.
“Think of your banker as an extension of your team, just as your CPA or attorney is part of your advisory team,” says Susan D. Steiger, vice president, commercial loans for Lorain National Bank.
“When we come out to see you, we don’t have the meter running. It’s part of our job to spend good quality time with our clients. We don’t send you a bill at the end of a meeting, so it’s something you should take advantage of,” she says.
And if your banker understands your business, he or she can bring you ideas that make your life easier.
Smart Business spoke with Steiger about how to establish a better working relationship with your lending partner.
How should business owners get their bank involved as they consider making investments?
Get your banker involved early when you’re weighing any kind of investment. Ideally, we’d like to be the first call when you have a major strategic move to consider. Whether an acquisition, buying out a partner or making a capital investment, it’s always better to start the discussion sooner rather than later.
Use us as a sounding board, bounce ideas off of us. We may have advice on structuring the deal or may have seen similar situations with other clients, so use that experience to your advantage.
On the other hand, you may be a nonborrowing client who doesn’t anticipate a need to borrow; maybe you’re just using the bank’s treasury services. It still is wise to begin a regular dialogue with your banker; the relationship ideally should be established before you have a borrowing request. Invest the time to educate your banker about your business, your markets and your industry — it will pay dividends down the road.
What else should a business owner expect from a banking relationship?
You should expect to have access to multiple levels in the organization. Make sure your banker is introducing you to others, especially top management. Your banker is your primary point of contact, but he or she is only one person and no one person is calling all the shots. Others at the bank are part of your team too, and you’ll benefit from everyone’s experience. Interaction with all the bank’s decision makers will pay dividends when your next credit request goes before committee.
We can also connect you with other valuable advisors. It’s our responsibility to introduce you to others, both inside and outside the bank, who have relevant experience. It might be for treasury management, investments or estate planning solutions, or tax advice — we can give you access to those professionals.
When is it a good time to talk with your banker about problems?
From the get-go, be forthcoming with information, both good and bad. It just is not a good practice to surprise your banker. When something happens seemingly out of nowhere, it raises red flags. We need to know if you’ve just lost a major customer, your new product launch is delayed or you’re in danger of tripping a loan covenant.
It’s a banker’s job to understand your business, and we know things don’t always go as planned. It is much better to deal with it as soon as you know about it because then we can help plan and strategize the next steps. Remember, we’re your advocate inside our organization.
Positive news often requires advance planning, as well. So let us know if you have just landed a major contract or are in negotiations for the purchase of a new warehouse.
How often should you be talking with your bank?
Your banker should be scheduling annual reviews with you. If not, then ask for it. This annual review is part of keeping the lines of communication open, but it also serves as a more formal process to review your year-end financials and the outlook for the coming year as well as to discuss any other needs you might have. But certainly meet with your banker quarterly, if not more frequently, on a more informal basis.
Also, get the other key people at your company involved in these meetings. Banks like to see that you have bench strength on your team and that the whole business isn’t being carried on your shoulders alone.
How crucial is it to negotiate rates?
Price isn’t everything. It is not necessarily the best strategy to negotiate every rate and price down as low as you can go. In the long run, if your banker is forced into that kind of relationship, when things get tough, he or she may not have the staying power to maintain the relationship. The financial relationship has to be a win-win. If the company is doing all of these things to foster a good relationship, it is going to get competitive pricing over the long haul.
I think it’s often frustrating for owners or managers to deal with the bank. They just would rather not do it or would rather delegate it to someone else, perhaps their controller. But that interaction is too important to ignore. The success of any relationship — personal or professional — always comes down to communication; it is the most important variable.
We are people and we are in a people business. Communication over time builds trust, and mutual trust is at the core of any good relationship. Everyone pays lip service to it, but it really is the key.
Susan D. Steiger is vice president, commercial loans for Lorain National Bank. Reach her at (330) 655-1824 or firstname.lastname@example.org.
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Typically when businesses think of their bank, they think only about loans and access to credit. But there is much more your bank can be doing for you, says Emily Ruvalcaba, executive vice president, division manager for corporate banking, at Bridge Bank.
“Of equal importance is working with your bank to focus on the cash management side of your business,” says Ruvalcaba. “Do you have the right deposit accounts, and are your cash balances working for you to the best extent that they can? Are payments being made and receivables being collected through electronic means? If your business transacts internationally, are you able to negotiate in multiple foreign currencies? Businesses need a banking partner that will advise them on the right products that will help to improve cash-flow and their bottom line.”
Smart Business spoke with Ruvalcaba about how to find the right banking partner and how to make the most of that relationship.
If a business is looking for a new banking partner, where should it start?
Look to your trusted advisers, such as your attorney, insurance agent or CPA, to refer you to a bank with the expertise that your business requires. Professionals such as CPAs have relationships with many banks, and they’re likely to refer you to those that can provide your business with the best service possible. When you share common professional relationships with your bank, you become part of a business community that is focused on referring only the best service providers.
Plus, someone such as your CPA knows your business, and will be familiar with your company’s banking needs. That person knows the products and services you have with your existing bank and is in a position to refer you to the business bank — and the banker — that can better meet your needs.
Finally, don’t choose a bank just because it may be located near your office. In today’s virtual world, you can do your banking from anywhere: make deposits from your office using remote deposit capture, transfer funds, make payments, send wires, approve payroll — all can be done using online banking. Choosing the right bank and the right banker is too important a decision to be based solely on physical proximity.
Once a bank has been identified as a potential partner, what questions should a business owner ask to make sure it’s the right choice?
Ask how well that bank and its bankers get to know clients. Do they visit their clients to understand how their business operates? The business owner should also ask if the bank has experience working with similar types of companies. Ask who will be handling your account on a day-to-day basis. Will you have a banker or a team of bankers that is going to be consistent, or are you going to be calling an unfamiliar representative through an 800 number?
Ask how often they expect to meet with you, because a bank that gets to know its clients is going to be able to provide a higher level of service. More important, if challenges arise within the company, the bank is less likely to overreact and it will be more willing to work with you, but that can only happen if a solid relationship has been built. For example, if a company that has borrowed from the bank is growing rapidly and its leverage increases to a level higher than was set through the loan covenants, the bank will be in a better position to show flexibility and a willingness to work through such issues.
By building a strong relationship and understanding your company’s operations, your banker will be better equipped to find ways to accommodate unforeseen circumstances.
Should business owners share the potential for bad times with their banker?
Absolutely. For example, if you know that your business is going to have a challenging quarter and may have trouble meeting loan covenants, it’s a great idea to pick up the phone and talk to your banker.
Bankers don’t like to be surprised with negative news. You’re going to have to deal with the issue eventually, and the more proactive you can be, the better that relationship will be and the more that bank is going to work to be your advocate.
How can your banker help your business in other ways?
Sometimes business owners are so focused on growing their business that they don’t realize the full extent of banking products that their bank can offer. Sit down with your banker and say, ‘This is how I run my business; are there any other banking services that my company can benefit from?’
It’s also a good idea to bring in your banker when you’re doing tax planning with your CPA at year-end, especially if the company is projecting growth. As you’re planning for the next period, your CPA and banker can work together to ensure that adequate financing will be available to support your goals.
Emily Ruvalcaba is executive vice president, division manager for corporate banking, at Bridge Bank. Reach her at (408) 556-8327 or Emily.Ruvalcaba@bridgebank.com.