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Cozying up to your banker can cure the recession shivers

Met with your banker lately? Now would be a good time, whether your company is in the market for a loan or not. Your banker can be your best friend when economic times are tough. But, as in any relationship, credibility and trust are key, and that requires mutual respect, honesty and staying in touch.

“Contact your banker often and keep them posted on what’s happening with your company, even if you’re not looking for money,” says Gary Fitchett, a Toronto-based financial consultant and author of The Financing Toolkit for Small & Medium Businesses. “Bring them into your inner circle, have them visit your operations at least once a year. Ideally, develop that relationship during good times so that you can count on the bank when times get tough.”

As businesses of all sizes have discovered, tightening credit markets have made getting a loan far more onerous. If you talk to the experts, though, it’s not all doom and gloom. Bankers are much more receptive to loan requests from companies they have established relationships with, notes Edmée Métivier, executive vice president of financing and consulting, Business Development Bank of Canada (BDC).

In fact, banks are quite willing to loan money to companies with solid business models. But expect more stringent due diligence and more questions from lenders. “Banks are more cautious these days.” says Métivier. “They want some degree of confidence that your company’s business model will survive. They are less inclined to take shortcuts on their due diligence checks. So expect slower turnaround times.”

Your business loan to-do-list

Borrowing money in a recession can make good business sense for well-managed companies that plan ahead. Fitchett and Métivier recommend a few things to consider in preparing for that critical meeting with your banker:

A. Decide what type of money you need
Is it equity, working capital or long-term money for fixed assets? Knowing what type of money you need will determine whether you approach a bank, credit union, venture capitalist or other financier.

B. Two lenders are better than one
Never leave yourself exposed to one lender. Part of your planning for the worst should be to shop around and establish additional sources of credit. If you are large enough, divide your financing between different institutions. If you are smaller, split your financing needs into shorter- and longer-term.

C. Satisfy the five “Cs” of lending

  1. Character: Does your management have the skills, experience and track record to deliver?
  2. Capacity: Do you have the ability to repay the loan? Banks will be looking at both your track record and your anticipated cash flow.
  3. Capital: Is your equity base strong?
  4. Conditions: How are local, national and even international events affecting your business?
  5. Collateral: Often mistaken as the most important thing a banker wants, collateral is actually lower on a banker’s priority list, compared to the other “Cs”.

D. Talk to your banker
As discussed earlier, don’t be a stranger; keep the lines of communications open. This includes meeting all of your company’s reporting requirements on a timely basis. “Sending your financial statements and other reports late to your banker leaves a very bad impression,” warns Fitchett.
Likewise, do not exceed your approved credit limit. If your company is going to need additional money, talk to your banker in advance to inquire about getting a temporary extension. “In other words, don’t come in at 11:30 on a Friday morning and say I can’t meet the payroll in half an hour. You will get a very chilly response,” adds Fitchett.
And lastly, be realistic about your short- and long-term cash flow projections and share this information with your banker. This can be used as the basis for your line of credit once it’s required.

E. Do your homework
When a banker asks for more data and more paperwork, don’t put up a fuss. Banks are in the business of lending money, but their head offices are doing more thorough due diligence these days to ensure the money they loan is for sound business ventures.
BDC’s Métivier also stresses the importance of firming up your business plan. “You’d be surprised how much time we bankers spend injecting focus and analysis into prospective clients’ business cases and plans. Entrepreneurs who do their homework and produce a solid business plan are more likely to get funding.”

F. Run a tight ship
This is back to basics stuff that not all companies stay on top of, focusing on activities like collecting accounts receivables, paying bills and tracking inventory. Banks will want assurances that you are taking care of the business’s fundamentals.

In a nutshell:

www.bdc.ca