Have You Hired The Right Bank

Recently I was visiting with a very good commercial lending officer.  We were discussing the current economic climate and the trends we both have witnessed lately with respect to commercial and Industrial (C&I) lending.

He made an off-hand comment that I probably did not adequately appreciate at the time, but upon reflection it hit me like a brick!

He said:  “I wish potential clients would perform a little due diligence, or at least a half hearted attempt to find out if we are a good fit for their company.”   He went on:  “The deepest questions I get are:

“How much will you lend me?’ and,
“What will it cost me?”

Upon further thought, I had the following considerations:

A typical bookkeeper, office manager, accountant or controller will usually cost a company between $25,000 and $90,000 annually (plus taxes and benefits).

When hiring for these positions, business owners/CEOs and their managers will typically go through many, if not all, of the following steps in search of the “best fit” for their company:

1. Create a detailed job description.
2. Write and place a classified advertisement in a newspaper or post the position on an internet job board.
3. Spend hours sifting through resumes or job applications
4. Spend hours interviewing qualified candidates in multiple rounds of interviews.
5. Spend hours negotiating with multiple candidates.

The above are pretty routine, common place and acceptable steps that businesses take to ensure they hire the most qualified person and maintain their desired culture.

What isn’t routine and common place are similar considerations given to what kind of institution they will borrow money from.   Considering that the interest incurred on a term loan or line of credit ranging in size of between $500,000 and $1,500,000 will fall roughly into the above annual expense range and last for several years, isn’t it appropriate for the business owners/CEOs and their managers to take more steps to determine if they are “hiring” the right lending institution?

It is entirely appropriate for a business owner/CEO to do some self examination first.  A good start is to ask some or all of the following questions:

• What do I want out of my bank besides money? Can my internal controls be enhanced with cash management tools? such as:

• • Positive pay.
  • Dual control over electronic funds transfers and check signing.
  • Investment sweeps of idle funds.
  • Automated advances from and principal payments to our line of credit.
• How much time am I willing to spend educating a bank about my business?
• What am I financing today (in terms of assets) and how do I expect that to change over the foreseeable future?
• What kind of growth can I reasonably sustain and how much growth am I comfortable with?
• From an outside perspective, what would someone (a banker) perceive as operational risks?

Almost without fail, I find that bankers are comforted to know that a business owner/CEO has gone through something resembling the above exercise, because it leads to a healthy discussion of the business and the bank’s ability to meet its needs.  Below is good example:

• What kinds of cash management programs do you offer and how might they benefit my company and strengthen our internal controls over cash?
• What do I have to provide you with so that you are comfortable with, and confident in, our ability to profitably run our business?
• Currently today, we have a term loan on some of our equipment, and a line of credit that finances our accounts receivable and inventory.  We currently lease our building, but have the right of first refusal to purchase it.  Can your bank finance all of this for us or will this be a problem in the future?
• We have historically seen top line revenue growth of 10-15% annually with spikes of up to 20%.Does this present a financing issue for you over the next few years?
• We operate a fleet of trucks that transport petroleum products. As such there is some risk of environmental contamination both on and off-site.  We do have internal policies and procedures vetted by our insurance underwriters that mitigate most of it.  Do you see this as an issue in obtaining financing through your institution?