What should you do when your banker says no?

With the new normal in the banking world being that of a more narrowly defined range of the meaning of the term “bankable”, it seems that almost every week someone asks me where they should go when they get turned down by their bank. The good news is that there are other options.

My first piece of advice, though, is to determine why the bank said no. Ask the banker to spend some time helping you understand why your need didn’t match with the bank’s needs – banks don’t make money by saying no, so there has to be a fundamental difference that can be explained. It could be that the business’s cash flow doesn’t appear to be sufficient to repay the debt over the life of the credit terms; that the collateral is not adequate from a valuation or liquidity or market sector point of view; that there doesn’t appear to be reasonable tertiary repayment resources (usually evidenced by guarantors or other collateral); the business, its management team and the vision for the company doesn’t resonate with the bank and its business model; or a myriad of other possibilities. The point is to ask the question and to understand why the answer, right now, is no.

Once you know why the answer was no you can begin to work on getting to yes at some future point.

Just a few days ago I spent time with two entrepreneurs who have a decades old manufacturing company.  The economy has caused the business plenty of challenges, and sales aren’t what they used to be, but the pair have made some hard decisions about expenses and they have some interesting new products that are expected to lead to a much rosier 2012.

Their immediate challenge is that they have no line of credit for working capital.  In years past, company leadership decided that having a revolving line would be an unnecessary distraction and expense.

Now, with the business having some operational challenges and a time gap to bridge toward better results, a bank solution is not likely to be approved.  As a consequence, we talked about their next steps: working first with their business banker (with whom they have term debt for real estate as well as deposit accounts) to determine whether their circumstances and long tenure would result in approval for a bank solution, while at the same time running a parallel course of conversations with local independent factoring firms that will almost assuredly be able to offer a solution, albeit with terms (mainly pricing and monitoring) that will be more onerous than a traditional bank solution.

The company is still vetting its options, but at least one of the factors has made a proposal, so more peaceful sleep should soon become feasible for the entrepreneurs.  Meanwhile, I have set a course of expectations with the company about the performance metrics that will likely be required to become “bankable” again.

With the obvious benefit of hindsight, one lesson this company and others may take is to establish a bank line of credit when you don’t need it (even though there will be some inconvenience and nominal expense), so that it will be there for you when you do need it.

With the onset of winter here in North Texas I had the opportunity to declare a snow day and get some otherwise unscheduled tasks done. Amongst my list of to-dos was something that I find very enjoyable, but don’t often enough stop to do – write an unsolicited recommendation of someone on Linked-In who has had a positive impact on my life.

I authored three of those today, in a span of probably twenty minutes, and the ROI for me is tremendous. Too often we get caught in the rush of the world and with all that we engage ourselves. Thanks, if offered at all, are brief and are often not memorable, even when sincerely delivered.

I get great pleasure and satisfaction from taking the very brief time necessary to really thank someone, in this case publicly via Linked-In, for their impact on me, my family or otherwise.

I challenge you to set time aside, THIS WEEK, to offer your thanks to some of those on YOUR list. You will be rewarded with the warmth of honoring someone in that special way, and warmth in the midst of what has turned out to be a cold winter, is a great sensation!

I’m amazed at some of the interesting stories I’ve heard over the years from entrepreneurs about their banking relationship.  Your bank and its bankers should be key professional advisors and advocates for your success.  Please take a moment to consider these scenarios – hopefully none will apply to you.

1.       Who calls whom?  In today’s challenging business environment your banker must be your partner, and he/she should be very proactive in managing the bank’s relationship with your business.  If you haven’t heard from your banker within the past 90 days, it may suggest that you don’t have that two-way relationship that the very best bankers deliver to all of their clients, not just their biggest.

2.       When you call your banker, do you get a return call within a reasonable time-frame, or must you follow-up to make the connection?  Many banks have changed the profile of their “ideal” client types in recent months.  Sometimes you don’t hear from your banker because he/she is reluctant to share the bad news that you don’t fit their profile any longer.

3.       You have a maturity on a credit facility coming up in the next 90 days.  Has your banker sat down with you to review your needs and the changes you and the bank have experienced over the past year?  If not, how can he/she possibly develop the “right” solution for your business?  Credit renewals (and new loans) demand advocacy and action by your banker, well ahead of maturity dates or other triggers.  What seemed automatic in the past is now likely to require more scrutiny by your bank.

4.       Your credit facility is only renewed for a short period (30 or 90 days quite commonly) instead of for the year (or longer) you’ve usually seen.  This can be a result of several issues, none of which are positive to your business.  Poor planning by your banker, inadequate staffing at the bank, lack of understanding of your business and its needs, lack of confidence in you or your business, lack of full financial information on the business; I could go on and on.  If it is you that has caused the problem, look in the mirror when assessing blame.  If not, your relationship is probably not well.

5.       You really “know” only two people at your bank – your banker and his/her assistant.  Your banker could:  win the lottery and decide to quit work; take a new opportunity outside banking or current geographical area; be encouraged to explore other market opportunities, or any number of other things.  If your point of contact is just your banker (and his/her assistant), your relationship is unnecessarily imperiled.  You must get to know the credit and underwriting teams and the local executive at the minimum.  You need multiple advocates supporting you at the bank.

6.       Your longtime contact at the bank introduces you to a new account officer, and their title has the words special assets, SAG, asset management, resolution or other cryptic yet ominous sounding phrase, your relationship may be suspect.  Let me assure you that not every client that has to deal with a bank’s “special assets” group is a doomed company, and banks sometimes erroneously paint a client with this tag, but it is imperative that you recognize that this change in account officer is NOT minor, and that you need to “think differently” about your bank relationship.  Special assets bankers often measure success by moving clients out of the bank.

7.       You have a long-term real estate loan that has a “bullet” maturity coming up within the next two years.  While your bank may have renewed this very same loan multiple times in the past, this is not the time to assume that the same will hold true.  The banking industry has undergone considerable change in the past two years, and the industry’s appetite, particularly for investor real estate, has changed the most.  If yours is a multi-tenant shopping center, low-rise office property, a hotel, or other property that relies on rental from tenants, start talking to your bank right now about what’s in store at renewal time.  Bank’s are under considerable pressure by their regulators and boards to reduce exposure to investor-owned commercial real estate.

If you find yourself burdened by one (or more) of the above issues, take action NOW.  Even in today’s tough business environment, there are a few banks that are looking to add great new clients, and will be very proactive to win a new relationship.  The government is taking proactive steps – primarily through the SBA – to support the entrepreneurial business community.  Your CPA, lawyer or insurance agent will often know which banks are in the market and which are out.  Also, just because your bank has delegated your relationship to their special assets group, I’ve seen many situations where another bank will see that same company as a great new relationship.

Please share your relationship story with me – I am always interested in learning.

I hope that your business already enjoys a great banking relationship…

Bruce Bradford
214-799-0395
http://www.criteriumsolutions.com

© Criterium Solutions LLC, 2011

I made an introduction of a local entrepreneur friend to an insurance agency executive today. We talked about the archaic and complex world that is the commercial insurance business these days, with the key focus being the back-office inefficiencies at both the carrier and agency levels.

I sincerely hope that the introduction is fruitful; the entrepreneur is a very bright young SMU MBA whose company is working on solving some of those very challenges.

Yes, their solution involves using lesser-priced overseas labor to develop the algorithms and software to bring value to their clients, but in the end we will all benefit from the better-managed process, and we’ve had decades to come up with a solution on these shores, none has yet appeared.

I have also introduced this same solution provider to an MGA executive that quickly grasped the value potential in creating single-input based data forms that will eliminate redundancy, a ratings engine that will speed up the analysis of various carrier’s proposals, and a data assimilation tool that will simplify the accounting across disparate systems.

Entrepreneurial creativity bringing value to a narrow niche in the marketplace.

What is the value you bring to your market?

A while back I enjoyed the opportunity to share, from a banker’s perspective, what I am focused on in reviewing a client or prospect’s financial statements. The questions from the group of about ten entrepreneurs helped me understand that for many, this is an area that is not well explained by the banking community.

First off, from a process standpoint, most banks take a client’s financial statements and put the information into a common format by way of a financial spreadsheet program. This assures the user of the resultant data that the information balances (or, on rare occasions that it doesn’t!), and that the information is presented in a consistent manner both across a span of time and across the dataset of all companies. By formatting the data in this fashion it is somewhat easier for your banker to quickly review the data and begin to make some conclusions as to the health and challenges a particular company may face.

For me, I like to start with the income statement, first considering the bottom line profit (or loss), the gross margin and net margin, sales volumes and the trends in each of those categories. That quick glimpse will begin to help me understand the company’s relative direction (growing, contracting, struggling, or thriving).

I follow the income statement with a look at the balance sheet. It is here that I can begin to develop a feeling about the company’s abilities to take advantage of opportunities or to weather a financial storm. Again, directional understanding is important, and key measures to be considered (which will vary by industry) include liquidity, the relative level of accounts receivable and of inventory, equipment, real estate and, very importantly, the balance between debt and equity.

Coupling the balance sheet with the income statement, an analysis can be made of the relative level (usually measured in days sales outstanding) of A/R, inventory, and payables, plus arithmetic measures of liquidity (current ratio, quick ratio), the relative efficiency of the company’s returns on assets and on the shareholder’s equity as well as other important measures.

Finally, financial analysis programs also provide very important data regarding the company’s cash flow. In the world of banking it is cash flow that is the number one source of repayment, so careful analysis of the cash flows, its strength and volatility will all play a large role in the bank’s full understanding the company’s historical (and prospective) ability to pay the bank back.

Comparative data is useful in determining how the subject company’s financial results measure up against similarly sized companies with the same SIC codes. There are national databases that aggregate financial data from multiple sources which is then put into a standard format for this type of comparison.

I suggest that you ask your banker to share your company’s financial spreads and comparative data next time you meet. Ask her to discuss what they look for in your financial results, and to share their perception of the areas where you are excelling and those that may be of some concern. That conversation will likely evolve to consider the “what ifs” related to your plans for the company. Does your existing financial condition position you for continued growth and the possible need for additional debt capital to do so, or should you instead be focused on pruning your operations to make your way through the storm? In today’s marketplace, more than ever before, it is important that you understand how the bank views your circumstances.