In my last column, I gave tips on how to have a good relationship with your banker and understand his point of view. This week, I’d like to share my 10 C’s on how to borrow with honesty and integrity. Follow these tips and you’ll have the best chance of growing your business long-term as you further enhance your relationship with your banker and become a better borrower.
1. 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.
2. 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 bookkeeping practices, regular audits, competent comptrollers, and mixing up your monitoring practices. You should also verify for yourself the details of your business’s financial situation.
3. 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 appraised of the situation, which makes their banks more likely not to react to unfortunate circumstances by demanding payment on loans.
4. 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. Bankers are more comfortable if they know what will happen in the event that something bad happens to you – like disability or death (God forbid) and will continue to work with subsequent leadership. It’s also wise to introduce your banker to the future generation of leaders at your company.
5. 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.
6. 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 it does ease the banker’s mind.
7. 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.
8. 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 politely making that clear to your banker. Knowing about your bank’s competition can also let you prepare for a quick capital search should your banker pull out.
8. 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.
10. 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. Talk with your banker and try to understand him. It will only be to the benefit of your business.
Look for me November 10 at 4:30 at the Book Festival of the Marcus Jewish Community Center of Atlanta. I’ll be discussing my book, “How Not to Hire a Guy Like Me: Lessons Learned from CEOs’ Mistakes.” The event is free and open to the public. Click here for more information.