In small or large businesses, we often end up dealing with banks and bankers beyond the checking account. When you have debt with your bank (your lender), the relationship takes on another dynamic. The typical loan agreement for traditional debt includes loan amount, terms, collateral provided, the covenants you must live by, and the dos and don’ts allowed. When things are going well, the relationship with your banker seems to always go well. It is in difficult times that things get tough. Let’s look at what your banker wants you to know.
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What Your Banker Wants You To Know
Your banks wants to know the bad new sooner than later. Furthermore, your banker does not want surprises. If you are having issues with your business, then discuss these early on with your banker. If you’re getting close to the limitations of your covenants, then let your banker know. In addition, if you see a change coming in your industry, then let your banker know early on. Be sure to give your banker the good news also. If you are planning on changes to Sr. Management, then mention these to your banker.
The banking world changes based on the economy, regulations, and markets. We remember 2008 when new credit at banking institutions basically shut down. Before that, it was fairly easy to get credit. And loan requirements were not as cumbersome – which is not always good. But the crisis caused a change in behavior at banks – some of it self implemented and some implemented by regulators.
In today’s market, money is still relatively cheap. There is an abundance of liquidity in the markets. So banks do want to loan money, but you must meet some basic guidelines.
What Commercial Banks Want
In order to loan you money, commercial banks basically want just a few things:
- They want to have collateral that secures their loan
- They want to know you have the cash flow to payback their loan
- They want to understand your business and they want to know what the funds will be used for
- They want to understand how much they will make $ on their loan to you
Different Types of Lenders
There are different types of lenders, including the following:
- Friends and family
- Commercial banks
- Asset based lenders
- Mezzanine lenders
- Hard money lenders
- Investors, private equity, and venture capitalists
The cost of that capital goes from cheapest to most expensive lender on the list above. The structure of the debt also goes from easiest to most complex structure in the list above. Some want collateral (security), and some do not.
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Keep Your Eye on Your Debt Covenants
Most likely, if you have commercial debt, then you may have some debt covenants stated in your loan agreement. Covenants are the requirements you as the Borrower must maintain to be in good standing with your loan agreement.
Oftentimes, the bank and banker find out something is wrong when you turn in your financials and/or bank compliance certificate. They find that one of the covenants is out of whack. You may have a debt/EBITDA covenant ratio as part of your covenants. This is a common requirement. Do not wait for you to “bust your covenants” before you reach out to your banker. Monitor your covenants closely. If you see drivers in your business that may create a problem with your covenants, then reach out to your banker.
Renegotiate Covenants
Believe it or not, I have been in situations where the loan agreement is already a few years old. The company has become much more financially healthy, and I went back to renegotiate certain covenants to ease the reporting burden. The bank was very open to modifying some covenants. Usually, you have to be in good standing and have a good historical track record to modify or request to modify covenants. But do not be shy. Simply ask. The worst that can happen is your banker says, “no”.
Most bankers in today’s market do really care about the relationship, even at the biggest banks. Your banker does want to see you succeed. If you are living through troublesome times, then your banker does want to see you get financially healthy. But you need to communicate with your banker. The worst thing you could do is hide something from your banker or try to sweep something “under the rug”. That will eventually come, out and you will have burned a bridge with your banker. After you hide something, or if you do not disclose something, your banker will always carry that doubt in the back of his mind. And they may not be there for you when you really need to negotiate that debt covenant.
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