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Thoughts on the Economy, Debt Financing and Banking Relationships - Jun 4, 2010

Posted by: Brian E. Christian in Articles

Thoughts on the Economy, Debt Financing and Banking Relationships

No one would argue that we are living in challenging economic times for emerging and middle market businesses:

· Unemployment rates are historically high and holding steady.

· Economic growth has been stunted without foreseeable increases.

· Businesses not seeing revenue growth on the horizon have no need to add employees or borrow money to facilitate the forecasted growth.

· Businesses “needing” to borrow money are usually financially stressed and are experiencing cash flow challenges.

· With little demand for loans from growth oriented borrowers, banks are focused on conducting the arduous task of cleaning up their loan portfolios and managing their bad debt reserves.

So where does all this leave the emerging or middle market company and business owner that has struggled to generate revenue and cash flow while becoming increasingly dependent on its line of credit over the last two and a half years?

Part of the answer lies in “relationships”. Another part of the answer lies in “business fundamentals”. The last part of the answer is a combination of both of the above.

Having been a banker and now a part time CFO for several closely held businesses, I have a somewhat unique perspective on today’s economic challenges faced by emerging and middle market businesses and how these challenges can be overcome with a strong vibrant relationship between a business owner/borrower and their banker.

I don’t remember who I heard this from first, but nevertheless, it is true that “relationships are a two way street”. No one would argue that it is not good business for a banker to continually reach out to his/her customers to see if there is a bank product or service that can help the business owner meet some of the day to day challenges related to cash management or internal controls associated with the company’s cash balances, or just simply to check on the health of his/her business borrower. After all, isn’t this, as a core part of business development or client service, part of the banker’s job?

The business owner is on the other, less talked about, side of the street. In spite of all of the demands on his/her time associated with running a business, the business owner must realize that the banker is a significant stake holder in his/her business. As such, it is incumbent on the business owner to make the banker feel as comfortable as possible in the knowledge that the business he/she has lent money to is in capable hands. However, I don’t think I have ever seen this in the job description of a business owner or CEO.

A business owner or CEO “keeps their finger on the pulse” of their business with direct, real time knowledge of his/her “Business fundamentals”. Knowing key information such as daily sales volumes, operational labor metrics, accounts receivable aging balances, gross profit by customer and overhead burden provide invaluable information on and insight into the performance of the business. Our founder and CEO, Jerry Mills is fond of saying something to the effect that he would bet on (that is if he was a betting man) “good information in the hands of a manager with average intelligence” over “bad information in the hands of a manager with high intelligence” every time.

The third facet of creating and maintaining a dynamic, vibrant relationship between you and your banker is to demonstrate to him/her that you are firmly in control of the fortunes of your company. You not only have the actionable information available to manage your business, you have created a culture of accountability within the company so that your managers are responsible for meeting defined objectives measured by your “business fundamentals” and you firmly understand the profitability drivers associated with your business.