You’ve heard the old one – that a banker always seems willing to offer a loan when you don’t need it. For small businesses, there is such truth in that statement that you can trust the story to be based in reality from experience.
There are great exceptions for growing businesses and for businesses that have a track record with a banker. Working capital loans and lines of credit are needed for growth and during times of business stress. If a business were operating above breakeven and revenues and expenses steady, profits would flow to either the shareholders’ pockets or to working capital and taxes. Each cycle gives the CEO a chance to use those profits to some positive advantage, including increasing the marketing budget, paying down loans, building working capital, increasing “sticky cash” balances or paying shareholders.
[Email readers, continue here...] But if a good business finds itself in a bad downturn, there may be a need that did not exist before for temporary cash, even as management reacts and moves to trim fixed overhead.
Approaching a banker during such times tests relationships. If there was no previous relationship, few bankers would rely upon anything but a personal guarantee backed by hard assets before considering a loan. But for those wise executives who included their bankers in occasional update calls, press releases, invitations to company events and an occasional personal visit, the strength of the relationship will often show its benefits during times when lending rules of the bank are near the “can’t do it” point.
For those with existing bank loans, that constant attention is more than just important. As loan covenants become closer to being violated or after such an event, bankers have some latitude in deciding how to handle their accounts. Upon discovery without prior notice or updates, bankers sometimes turn the company over to the bank’s workout group – a place you never want to visit. In the gray area where covenants are broken but barely, covenants can be waived for a period of time as companies rectify the problems, all based upon the quality of the relationship between banker and client.
It is during those challenging times that it is most difficult to tell the story to your banker, but just then the most important of times.