Banking Relationships – Falling in Love Again

Do you feel like your relationship with your bank (and banker) is in a lull?  Maybe your banker has become distant, they don’t come to visit, or you only hear from them when there’s a problem.  You haven’t been invited out to lunch or to play golf in well over a year.   If you do get a call, it usually involves your financial statements, which prompts a battery of technical questions about your business and/or your financial performance.  And this is coming from the bank you’ve been with for years.  It sure seemed like your bank loved you when they extended your loan, but now it feels like your relationship has faded.  What’s the problem?

Of course, the Bank is to blame.  You are the client, and THEY should be calling you to check in.  THEY should be inviting you to lunch and play golf.  THEY should understand your business and your industry.  THEY should recognize the short and long term challenges you face each day.  And THEY definitely shouldn’t be peppering you with all these questions.

After all, you’ve been a client for many years, your business is profitable, and you’re paying your loan on time.  The Bank should know their money is safe with you. They should know they are going to get paid back.

So, what’s changed?  Where did the love go?  And why all the fretting and hand wringing?  More importantly, how should you deal with it?

You are probably right.  Your relationship has changed.  Why?  Because banking has changed.  The world has changed.  Fortunately, there’s some simple things you can do to get your banker to fall in love with you all over again.  So, here’s some words of wisdom, from a veteran of the commercial banking industry.

1. Be Proactive – Keep The Bank Apprised

Let me preface my comments by recognizing there is a protocol for a typical customer/supplier relationship.  The banker as the supplier should be extending the invitation for lunch, golf, or any other type of customer engagement.  But since that is not happening on a regular basis, why not take the initiative and make it happen?  BE PROACTIVE, and extend the invitation.  Call your banker, acknowledge that you haven’t heard from him/her in a while, and then ask them to join you for lunch, golf, or any other type of personal interaction you believe is worthwhile.  Now to make this step truly worthwhile you must take the additional step of having an agenda of key items for discussion.  Bring them up to date on your business, your financial performance, current and expected challenges, and where you need their help.  Bring your fiscal year-end financial statements, along with a current financial statement, and any other information you think they may need.  Then ry this on a quarterly basis.  I assure you the bank will be more receptive to your needs, and your relationship will begin to improve immediately.

2. The Bank is Not an Equity Partner

One common misnomer of many borrowers in the banking world is that simply paying the interest on borrowed money is sufficient..  It is not.  Ultimately, the bank wants to have the original principal repaid.  So, if you are not repaying or periodically reducing the principal on your line of credit or loan, sooner or later the bank will get anxious.  While the bank provides significant capital to fund your business, and may sometimes may refer to itself as “your financial partner”, it does not mean an equity partner.  In many cases, the bank has a much larger financial investment than the equity investors.   But unlike an equity investor, the bank does not get a share of the profit when the business is successful.  The bank only receives a fixed rate of interest for taking a calculated risk with their money.  The bank’s risk calculations ALWAYS include getting repaid principal, at or before maturity.  With interest rates at historic lows, returns on commercial loans are also at all-time lows.  What’s more, the bank regulators are increasingly more focused on stagnant loans that represent a higher risk of default.  So the message here is, even with loans that require interest-only payments, consider reducing the principal periodically or systematically.  Otherwise you should begin planning and saving for the repayment of principal long before the loan approaches maturity.

3. The New Mindset ‐ Even the Best Borrowers Can Default

1. During the most recent recession, banks learned the hard way that even the best and most successful companies and individuals can default.  Even those individuals with seemingly impeccable character and significant income at the time the loan was made, with 20 or 30 year borrowing relationships, can default.  What happened?  It’s the new mindset,  coupled with a more litigious society.  Where people typically discuss a “short sale” as if it is a savvy, run-of-the-mill financial strategy.  Bankruptcy is more common than ever.  Remember in #2 (above) where the bank begins to get anxious about getting repaid?  This is why.  So what should you do?  Implement #1 – Be Proactive – Keep the Bank Apprised, while being cognizant of #2 – The Bank is Not an Equity Partner.

Hopefully, this summary will help explain how bankers think, and you can develop your relationship plan accordingly.