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Preserving a Bank Line of Credit

After 20 years of having a bank line of credit, a bridge contractor from the Midwest found out the hard way that bank credit should not be taken for granted. After experiencing its first ever loss, the contractor sent its profit and loss statement to its banker. Three days later, the contractor learned that the line of credit was being terminated immediately.

Despite the loss, the company still had plenty of assets, a positive net worth, great employees, never experienced a loss before and the bank “knew” them. The company was just days away from starting work on a $40 million project, which couldn’t begin without access to significant credit.

So why did one bad year lead to the total loss of bank credit and the destruction of a fine and reputable firm? There are always mitigating circumstances, but perhaps it was because the contractor didn’t understand well enough how banks work and what information they require. It might have been because the firm didn’t understand a banking relationship is just that—a relationship between two firms made up of individuals that need to be nurtured to thrive.

What does a banker look for in order to approve a loan request? Many would say a solid background, business or property—the usual stuff. But this response indicates a one-way relationship, not a long-term relationship.

Why would anyone ever want to be part of a relationship that only delivers in one direction? Unfortunately, many businesses owners and CFOs seem to have similar limiting beliefs that can hinder their ability to get or keep bank credit. What banks really need is quality, verifiable, truthful information, organized in a professional manner, and presented in a way that reassures the bank of the firm’s long-term future.

When companies hit rough patches, as every company will sooner or later, providing this information annually is helpful. But if this is the only information or contact that the bank has had with the client in the past year it may come as a quite a shock to the bank official reviewing the financials that things are not going well. Hence, “the usual stuff” can substantially miss the mark.

Banking relationships take work. If business is doing well, a quarterly discussion and exchange of financial information is well advised (and in light of the financial crisis of 2008, probably required). On the other hand, a struggling business would be wise to provide up-to-date financial information on a monthly basis and to follow it up with a phone call.

When a business is struggling, providing just the profit and loss, balance sheet and loan covenant worksheet may not be enough data for the bank to understand the complete picture. Providing sales projections, A/R and A/P aging reports, legal action status reports, and other relevant data such as overhead growth, changes in key employees, surplus asset sales, and important market places changes can mean the difference between bank credit and no bank credit.

Financial Analysis (1)

A bank’s fears may also be alleviated by strengthening internal controls. No bank wants to wonder if its investment is being handled well. Instituting a purchase order system, upgrading accounting software to track activities and better control spending, adding a CRM solution to capture more sales, seeking outside experts to help ameliorate bottlenecks, improve business processes, reduce job costs, recover spent cash, reduce expenses, or in any way strengthen the business can curry favor with the bank at a time when it is needed most.

It would be wise to call the banker when things are going very well—and not so well. Don’t try to embellish or overstate the positive developments and don’t try to hide the really rotten news. Be forthright in delivering the news. Bankers deal with businesses all the time. There is probably very little that can surprise them.

Bankers are intelligent and financially savvy individuals. If a company tries to conceal the truth it will come out. If it is the banker that uncovers the truth, it will not bode well for the relationship. As Gregory Reese, vice president of commercial lending for PNC Bank says, “Bankers don’t like negative surprises and in today’s world there should be an on-going dialog so that there are no surprises for either party.”

If the company has had poor financials in the past year or two, then it is time to pull out all the stops. Follow the recommendations above, seek specialized counsel, and adjust financials to make the numbers better, if possible.

Instituting the suggestions above will help keep a line of credit—and keeping a line of credit or loan intact now is much easier than trying to restore credit later.

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