Most of my day is spent playing "let's make a deal:" negotiating with lenders, creditors and bankers in order to get CEOs and their businesses new terms that allow continued operations.
In my experience, it's particularly difficult for these two groups — business leaders and bankers — to understand each other because they're coming from such different places and have seemingly different priorities. Part of the process is helping both sides see that they're in a partnership.
Both bankers and business owners want to see the business continue to run because that's the most likely way for the bank to recoup its loans and eventually see profits, and it's the only way that the business will turn from debt to profit. Thus, as a business owner, you should strive to understand how your banker thinks, and why he thinks that way. This can have a positive effect on your relationship and make it easier to get money when you need it.
I present to you, then, "The CEO's 10 C's of Borrowing," which will help you become a better borrower, enhance your relationship with your banker and make money more available when your business needs it most.
• Character is of the utmost importance to bankers. Bankers need to know you'll do the right thing when your company is in distress. If they can't trust you, they can't put money in your hands. That doesn't mean fake good character; it means have and demonstrate good character.
• Carelessness comes down to poor record keeping. Carelessness can also hurt your bank by causing it to write off loans needlessly or even lose its federal loan insurance such as SBA guarantees. Run your shop well, which includes good accounting practices, ensuring independent oversight/audits/reviews, competent controllers and mixing up your monitoring practices. Not being careless also means verifying for yourself the details of your business's financial situation.
• Complacency is not an asset. Banks are interested in how you react to tough situations. Don't just tell them what you're legally required to when they ask. Keep them updated to avoid surprises. Bankers hate surprises. This is all a part of the larger principle of being proactive rather than reactive. Proactive business owners keep their banks apprised of the situation, which makes their banks more likely not to react to unfortunate circumstances by demanding payment on loans.
• Contingency plans are key for orderly succession if something happens to you. Bankers value stability, and even though many business owners think they're invincible, history has proven otherwise. If your bank knows what will happen in the event that something bad happens to you — like disability or death — that's comforting to them. If they know what will happen to your business in the event of various catastrophes, they'll continue to work with subsequent leadership. It's also wise to introduce your banker to the future generation of leaders at your company. Have contingency plans. Nothing works out like your spreadsheets suggest.
• Capital is your net worth (assets minus liabilities). Bankers want an extra cushion of equity so they can be more flexible with your company in case it has a bad year. A CEO and a banker need to balance one another's needs in order to maintain sufficient capital. I sometimes find that telling entrepreneurs, owners and CEOs to keep extra capital around is like telling a dog to save part of his dinner for later, but if you can show your banker that you're capital-wise, he'll be more likely not to call your loan after a bad year.
• Collateral is a bank's leverage and makes bankers feel more comfortable. Collateral does not repay a loan, as many entrepreneurs think when they pledge their assets, but again, it does ease the banker's mind.
• Capacity is your ability to repay. Bankers check to see if you have champagne tastes but a beer wallet. If you seem like you can repay what you're asking for — which is to say, a reasonable sum and not your dream loan — you're more likely to see the money. Shoot for the stars in life, but a bank loan is a different matter.
• Competition works to your advantage. Banks are concerned about their competitors' interest rates, collateral packages and guarantees. You can use this to your advantage by doing your homework when seeking a loan and making that clear to your banker (though no one likes to feel threatened, so be courteous about this). Knowing about your bank's competition can also let you prepare for a quick capital search should your banker pull out.
• Controls are your built-in monitors. Bankers want to know about your company's controls. Do you have checks and balances for payroll clerks, controllers, CFOs and inventory personnel? Do you watch the back door? Outline the steps you take in your plans and conversations with your banker; ask for his recommendations. If you find an issue, correct it and then update your banker that you've fixed the problem.
• Communication is essential. Almost every one of these tips hinges on communication. Don't keep things from your banker. If he knows what's happening he can work with you instead of against you. Work with your banker for the best relationship.
With "The CEO's 10 C's of Borrowing" in mind you'll be better equipped to understand where your banker is coming from and not get frustrated when things don't seem to go your way.
Provided by Cornelius resident Dave Gilroy, managing director of Scale Finance LLC's Charlotte office. Scale Finance provides contract CFO services, Controller solutions and support in raising capital or executing M&A transactions to entrepreneurial companies. Learn more at www.scalefinance.com. The author, Lee N. Katz, is managing partner at GGG Inc., the country's oldest turnaround firm and a leader in crisis management and corporate rescue.