Government-mandated closures. Supply chain disruptions. Customer nervousness. Public-safety protocols. Employee fear. PPP forgiveness. Union pressures. A national coin shortage. Enough already!
It’s all most businesses can do to survive these days, rather than thrive. In the midst of all of these challenges, there are relationships critical to our clients' businesses' short-term and long-term health.
One that keeps coming up, but isn’t addressed very often, is the relationship between business owners and their bankers. But how do you collaborate with your bankers during times of crisis and stress? How do you make this critical relationship work to your benefit over the long term?
To get some clarity on this, I reached out to several banker friends and conducted informal interviews. I spoke with relationship managers at large, medium, and small banks, and asked them a set of questions about what they need to assist their clients, primarily on the credit side.
While I would like to thank them publicly for the gift of their time for this post, interestingly, none of them would agree to be quoted directly. I guess that’s just a sign of the times, as well as the fact that most banking relationships are governed by strict sets of written guidelines, many dictated by government mandates and legal requirements. We spoke on general background terms, and the results were fairly consistent across the spectrum of banks.
Several themes emerged from our conversations, all of which seem particularly relevant for these challenging times.
It’s not about you
As business owners, we are passionately devoted to the success of our businesses. Much of our life’s work is tied up in our products and our employees, and we take it personally when things go off the rails. And let’s admit it – it hurts our pride when there are “CLOSED” signs on our doors (especially when they bear our names), let alone when we aren’t successful and growing.
But as one banker pointed out, everyone has at least some damage to their financial statements due to the global pandemic. Whether it’s lower sales, increased operating expenses, decreased margins, loss of key employees and institutional knowledge, stressed cash flow, or key financial ratios that are underwater, it’s rare in this time that businesses are unscathed.
My correspondents told me that they expect these things and know that it is not due to mismanagement that your financials are stressed in most cases. In fact, they would be more surprised not to see these things. They urge their clients to accept the fact that most challenges you are facing are not of your making, that pretty much everyone is experiencing many of these same challenges, and that your bankers are trying to keep up their end of the relationship.
Nature abhors a vacuum
That said, Aristotle wrote long ago that nature abhors a vacuum, and I believe that human nature is such that we fill information vacuums with bad news. For example, if your employees get wind of a significant change in approach, staffing, etc., we know that rumor and speculation will usually go towards dark extremes. I get the sense from my correspondents that while they expect to see bad news and damage your financial situation, the question really focuses on how bad things are, what is happening, and what is your plan?
My banker contacts emphasized over and over that a healthy banking relationship is fed by constant and transparent communication. And that includes communicating bad news as well as good news. Interestingly, they also emphasized the need to understand what is going on underneath the numbers.
- What key relationships are being stressed during these times?
- Are you able to access adequate supplies to serve your customers?
- What are you doing to keep your employees safe and comfortable with carrying out their responsibilities?
It is one thing to have secure systems to enable remote work, but it is entirely another to provide a safe workplace for those required to be on site. Your bankers see a broad swathe of businesses, many like yours; they have a comprehensive perspective and are pleading with their clients to reach out.
Vote early, vote often
With apologies for this topic's sensitive nature right now, here is a highlight of what I am hearing from my correspondents: “Reach out sooner rather than later, and keep lines of communication open and flowing.”
The key here is not to wait too long to have “the conversation.” My correspondents, all relationship managers, were united in emphasizing that there are things that they can do to help you, but that they need to be in the loop earlier rather than later. Whether there are issues with loan covenant ratios or cash flow (and bankers want their clients to bring these forecasts to them), early communication provides your bankers with more tools to help you through the challenges. The longer you wait to have “the conversation,” and the worse things get, the more limited your bankers are in what they can do to help.
Paraphrasing what one banker told me:
You want to keep the conversation with me going as long as you can because if you wait too long, you’re that much closer to special assets, and you don’t want to go there.
Another suggested that her experience (admittedly a small sample size) was that clients who reached out to her early in the pandemic were much less likely to have serious challenges later in the summer because they had the conversation early.
Your bankers need current information to be able to collaborate with you on a path forward. And PLEASE, they ask, do not wait until Thursday afternoon to call your banker about needing cash for Friday’s payroll.
It’s your business
You know your business inside and out. You know what switches to flip and dials to adjust to keep your operations alive. But along the lines of “it takes a village to raise a child,” my banker correspondents emphasize that they want to collaborate with you to find solutions to keep you going. But they need information on what’s happening and what your plans are.
One banker specifically emphasized the need to communicate your 9-12 month operating plans and resulting forecasts as soon as possible.
One banker went farther, sharing that she was asking for cash flow forecasts in 13-week (basically quarterly) increments out into 2021. What are your specific challenges, and what are your plans to address them?
Another banker shared she was looking for a set of contingency scenarios: if cash flow falls to certain levels, what are the series of steps you will take to stay operating? And along those lines, she stated that she was looking for forecasts, particularly on cash flows, to see how PPP funding impacted results and what those results would have looked like without PPP cash.
It may be just basic managing expectations: being transparent in how the pandemic affects your business, what your plans are, and what you expect to happen. And the notion of transparency works its way into this conversation as well. Don’t hold back critical parts of the picture, only to create unreasonable expectations that most likely cannot be achieved.
My correspondents say:
Your chances of long-term success with banking relationships are greatly enhanced by communicating reasonable expectations early and meeting them (good or bad), as opposed to presenting overly rosy forecasts in the short term, only to miss them.
Parting Thoughts
When you selected your banker (or your CPA, for example), you most likely went through a process of examining their experience in your industry, the scope and reach of their services, and their ability to understand the subtleties of your operations. You looked for the best rates, of course, but your selection process probably went deeper than that. As you think about working with your banker, I believe it is helpful to remember why you initially made your selection and why you felt this particular relationship would be the best one for you. Remember that the notion of a healthy relationship requires two-way communication to function, and your banker should be a trusted part of your team.
They want you to survive and thrive; help them help you.
About the Author
Kurt Maass is a versatile and accomplished executive with 30+ years of experience in finance, accounting, and operations roles. He has worked extensively in the wireless, landline telecom, ecommerce, manufacturing and energy conservation sectors, including serving as divisional and public company VP-Finance and CFO, in addition to public accounting firm experience.
He brings a unique perspective from working with both very large companies (managing operational and capital budgets in excess of $2B annually) as well as very small early-stage start-ups, where he has actively participated in multiple equity and debt financing rounds. He is experienced with the International Financial Reporting Standards, having converted a Canadian-GAAP reporting company to IFRS for stock exchange reporting purposes.
