Guidelines to Improve Your Company’s Banking Relationship (In the Style of Poe’s ‘The Raven’)

Need to Borrow Money? Demonstrate Good Character and Cash Flow Above All

Typically, there is significant triage to be done before determining if you can improve your company’s banking relationship. Most often, the problems come back to cash flow and a misunderstanding of what banks do. While Boards do not manage banker-customer relationships directly, they are responsible for the firm’s capital structure, and that always includes the bank/lender. In these cases, the Board exercises its voice to the bank through the CEO and CFO.

The two issues that drive the banking relationship are:

• Character—Will the borrower put the bank’s interests ahead of the company’s?
• Cash flow—Does the company have enough margin of safety in its cash flow so that the bank is assured it will get its money back?

Perform Business “Forensics” to Improve Banking Relationships

Frequently, in the recent past, I had to help a number of clients improve banking relationships. When the tough conversations would begin, I had to ask clients to view their bank as if it were a company that leases highly sensitive scientific research equipment. Think of a piece of equipment in a police forensics lab for example.

Borrowing money is like leasing a DNA Sequencer because the business issues are the same:

• Relationships—The bank wants to know you well before you submit an application, and the leasing company will not send equipment (money) until they are convinced they can trust you with it.
• Repayment costs—They want all of their equipment (money) returned on time. You pay interest/fees/lease payments for the privilege of using their equipment (money).
• Duration expertise—In both cases, there is a deadline for returning their asset. You cannot receive the equipment (money) until they know your scientists (CFO) know how to operate it properly.
• Controls—Regular calibrations (covenants) are used to prevent the equipment (money) from being misused.
• Customization—You negotiate the specifications of the equipment (loan) to best suit your needs.

When put in this light, it is easier to understand why banks behave the way they do. If you have a current facility, then yes, you are a client of the bank. But only so long as you follow their rules. They really care more about getting their money back than what happens to your business.

Transparency is important if you want to improve banking relationships. As Greg Powell, Head of Brand and Product Marketing at Fundbox said in an interview:

“The more info you can provide, the better. Make sure the info you present shows the best and most complete picture of your business. Either choose to show multiple bank accounts, if you have multiple, or choose the single one that best reflects your performance.”

In short, you should expect banks to care more about their success than yours. You can improve the banking relationship by adjusting your expectations and by understanding the expectations of your bank.

Quoth (An Actual) Banker

A banker I have worked with on several assignments summarized the issues from an insider’s perspective. His bluntness is based on 30 years of seeing how things really work:

• Banks don’t lend money until you prove you don’t need it.
• Net income does not pay the bills. It’s all about cash flow.
• Loans are secured by assets and hard collateral, not POs or prospects.
• Guarantees rarely repay loans, but they keep the borrowers committed to repaying.
• Be careful of CPAs who are overly aggressive. If they are saving you too much in taxes, you may be getting hurt somewhere else.
• Bad news does not age well. Let the bank know about trouble before someone beats you to it.
• Stock in your company is not a tangible asset and won’t improve your net worth.
• Banks lend based on the character of the borrower. Everything else is to keep the borrower committed/focused.

A Dramatization of Banker-Customer Relationships in the Stylings of Edgar Allan Poe

While one doesn’t usually associate Edgar Allan Poe with banking, this take on his classic poem “The Raven” sums things up nicely:

Quoth the Banker, “Watch Cash Flow”

Once upon a midnight dreary as I pondered weak and weary

Over many a quaint and curious volume of accounting lore,

Seeking gimmicks (without scruple) to squeeze through

Some new tax loophole,

Suddenly I heard a knock upon my door,

Only this, and nothing more.

 

Then I felt a queasy tingling and I heard the cash a-jingling

As a fearsome banker entered whom I’d often seen before.

His face was money-green and in his eyes there could be seen

Dollar-signs that seemed to glitter as he reckoned up the score.

“Cash flow,” the banker said, and nothing more.

 

I had always thought it fine to show a jet black bottom line.

But the banker sounded a resounding, “No.

Your receivables are high, mounting upward toward the sky;

Write-offs loom.  What matters is cash flow.”

He repeated, “Watch cash flow.”

 

Then I tried to tell the story of our lovely inventory

Which, though large, is full of most delightful stuff.

But the banker saw its growth, and with a might oath

He waved his arms and shouted, “Stop!  Enough!

Pay the interest, and don’t give me any guff!”

 

Next I looked for noncash items which could add ad infinitum

To replace the ever-outward flow of cash,

But to keep my statement black I’d held depreciation back,

And my banker said that I’d done something rash.

He quivered, and his teeth began to gnash.

 

When I asked him for a loan, he responded, with a groan,

That the interest rate would be just prime plus eight,

And to guarantee my purity he’d insist on some security—

All my assets plus the scalp upon my pate.

Only this, a standard rate.

 

Though my bottom line is black, I am flat upon my back,

My cash flows out and customers pay slow.

The growth of my receivables is almost unbelievable:

The result is certain—unremitting woe!

And I hear the banker utter an ominous low mutter,

“Watch cash flow.”

—Herbert S. Bailey, Jr.

(Source:  Reprinted from the January 13, 1975, issue of Publishers Weekly, Published by R. R. Bowker, a Xerox company.  Copyright 1975 by the Xerox Corporation.)

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[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Concepts Applicable to All Borrowers & Lenders and Alternative Structures- PO Financing, Factoring & MCA. This is an updated version of an article originally published on August 17, 2018.]

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