Building a Real Banking Relationship The Borrower’s Responsibility

Many small or lower middle market companies in America have received benefit through the PPP stimulus program or bank deferrals on monthly debt payments or both.  These programs have had the exact impact on business and the economy that the government had hoped for, but the government alone cannot fund business throughout the recovery.

Barring some new government stimulus, in the fourth quarter of 2020, the responsibility for the continued sustainability and recovery of small businesses will move to lenders.  Undoubtedly small and lower middle market companies will continue to struggle while operating at levels significantly below 2019.  The need for additional working capital and patience from lenders is likely to be widespread among borrowers.  The responsibility for supporting and saving small and lower middle market businesses will fall to bank lenders.

If the government provides further stimulus, it will only serve as another bridge; it will not be a permanent fix.  In any case, when government funding of losses and easing of banking regulation ceases, there will be a massive group of companies seeking incremental working capital, deferred payments, and loan forgiveness.

How will each company be sure to get the additional funds and time they need to survive and thrive from within a group of needy borrowers? 

Here are some steps to help improve the probability of success in securing incremental financing and terms from your bank.  With or without additional stimulus, this process should start immediately: 

Cultivate a relationship with your lender

For the last 20 years, the balance of power has been in the hands of the borrower.  There often has been no real relationship between the parties.  Borrowers have been able to ask for anything, and either their current bank gave it to them, or they got it from a new banking relationship.  Those dynamics have changed dramatically, and both parties will have few options but to work together, communicate closely, and let time help them resolve the relationship’s financial issues. 

Act ahead of the need

Now is the time to start communicating with your lender, well before you are in need. Don’t hide, engage.  Explain that you are assembling financial projections and share your initial assumptions. A good start would be a weekly cash plan and a current and complete (conservative) collateral analysis of the existing facility.

Put your ego in your pocket

In 2020, we have all found ourselves in a situation that was inconceivable only a year ago.  Mistakes are being made every day in every industry; no one knows what the future holds.  So don’t worry about how the business got to where it is; put your energy into what the company can do going forward.  Business performance is absolute; you are either making money or your not.  There are no scores for “form” that count.  Most borrowers are in the same boat, so focus on what is right going forward and not what was wrong in the recent past.

Speak to your bankers in the language of finance. 

You need to provide both historical and projected financial information to your lender regularly.  While no one knows the future, projecting your business’s complete financial standing gives you an improved understanding of your business and the critical areas of focus.  Comparing actual results to your projections will help you to refine and improve your forecasts. 

A complete financial plan will determine your future requirement

A comprehensive financial plan that will include the documents below:

• Monthly Statement of Operations
• Monthly Balance Sheet
• Monthly Statement of Cash Flows
• Collateral Analysis
• 13 Week Detailed Operating Cash Flows, and 
• Covenant Analysis

will define the amount of the shortfall and when that need will occur.  Based on the projections, you can work with your lender to create a  considered request for incremental business financing.

As the pandemic goes on, more businesses will need incremental working capital from their lender.  In a crowded field, getting the support you need will be based on the following.

1. How credible is your lender within his or her bank?

Selling a deal within the bank is the most critical characteristic of your loan officer.  In the current environment, you won’t be able to change your loan officer’s credibility, but you can help him be more prepared.

2. How prepared is your lender to sell your loan request to the powers within his bank?

When the borrower provides complete and fully contemplated financial projections for the business, the loan officer will be best prepared to support the loan approval.

3. Is your loan officer confident in the financial projections and assumptions?

By building the plan in cooperation with your loan officer, the lender will have the knowledge and confidence to give their best argument for your loan request.

The process outlined above takes months to build and complete, while the term of the CoVid related economic strife is unknown.  Starting immediately to build a strong and interactive relationship with your loan officer will give you the highest probability of securing the loan you need and coming through the pandemic with renewed viability.