Every independent business owner needs a good relationship with their bank, but how can you cultivate one, if your banker just keeps frustrating you?
We suggest you learn to speak their language, especially when speaking to them in your language isn’t working!
Considerations:
Timing – Ask for the money when you don’t need it!
Most bankers do an annual review. This is when they gather your financial information, update your file and renew your bank agreement for the next year. Since bankers are either lazy or want to be efficient, they only want to do this review once. Therefore, when you ask them for a new loan in the morning expecting it to be approved by the afternoon, what you are really asking is for them to complete the annual review process over again and change all the paperwork! This extra effort could cut into their lunch hour!
The solution is to find out when your annual review takes place and ask your banker for money before your file is reviewed. There are two useful requests to make:
1) Pre-approved capital purchase spending. Your bank has the ability to pre-approve an annual amount for capital spending. Then when you find a truck for sale and need the cheque today before someone else buys it, your banker can use the pre-approved loan to fund it.
2) Ask for an increase in your line of credit at each annual review. The line of credit financing gives you day to day cashflow confidence. If you are always worried about running out of money, it can increase your stress and may affect your decision making.
A growing business often consumes cash. You need the confidence to spend a quarter today in order to collect a dollar a few months from now. If you don’t have the quarter to spend your business won’t grow. Bankers like to fund growing and profitable businesses but they need to be told about your growth plans ahead of time. Don’t wait until you run out of money to ask them to increase the line of credit! Approving an increase in the line of credit is another complete revision to your loan agreement and will likely cause your banker to work through their lunch hour again!
Feed them the right information
Think of the bank approval process as an old-fashioned meat grinder. You have to put the information into the top of the grinder, then a bank employee turns the handle and your loan agreement comes out the bottom. The meat grinder needs to get the right information fed into it in order to get the answer you want back from your bank. (By the way, the meat grinder doesn’t care that you started banking with them when you were a kid or that you have not missed a single payment in your life – it should – but it doesn’t).
The meat grinder really only works on two ingredients:
Ingredient 1) Cashflow income in excess of your payments – Your bank will calculate whether you will make enough cashflow profit over the next year to cover your payments plus a little bit extra for you. If you feed in financial statements with red ink you won’t get the answer you want. This is where your accountant can really help you. Ask them for help with feeding the right information into the meat grinder.
For example, that bunch of pretty, but confusing paperwork called last year’s income statement, may have one-time expenses that won’t show up again next year. Your accountant can help adjust out all the non-recurring items to get a better picture of the coming year. Your accountant also knows how the meat grinder will calculate your cash flow and can check the numbers before you submit it to the bank!
Ingredient 2) Assets to back up the loan – Banks are still very conservative and like the comfort of solid security. The one thing banks don’t like is when you don’t have enough “skin in the game”. It’s best to think of yourself as one of the business bankers, too. If you are willing to leave some profits in your business and build its financial strength, your banker will enjoy partnering with you.
Beware of the “good cop – bad cop” approach – One reason I like the meat grinder analogy is so I can point out that the loans officer who meets with you is the “good cop” – they are the one that turns the handle of the meat grinder. The banking system also has a “bad cop”; it could be a live person in the “credit” department or it could be built into their software.
In order to get the right answer from your bank, the goal is to help the “good cop” to convince the “bad cop” that you are a responsible and law abiding citizen of the bank!
I should write a book about all the business owner – banker interactions I have been involved in over the years! Some are pretty unbelievable. I find it quite rewarding to help business owners and bankers get to win-win relationships. If you need some help in this department, let us know. Maybe your story could eventually make it into the book? We will change the name to protect the innocent, of course!
