Business, after all, is nothing more than a bunch of human relationships.
– Lee Iacocca
All business owners – at least those with a chance at long-term success – know that relationships are critically important across many areas of business. A company’s relationships with its customers, shareholders, suppliers, and employees receive a good amount of attention even under normal circumstances, and they are absolutely critical when navigating through the economic fallout of the COVID-19 pandemic.
But there’s one important business relationship that is often neglected by small- and mid-sized companies, one that could make or break your business in a stressed environment – it’s your relationship with your banker.
In this article, we explain four specific actions a business owner can take to cultivate this critical relationship during the COVID-19 crisis. While some aspects are specific to this particular situation, most are relevant any time a business is facing challenging financial circumstances.
- Treat it as a true relationship. Many business owners and entrepreneurs view their banking relationship as a transaction-based arrangement. Instead, you should view your banker almost as a partner in your business. If you have been cultivating a banking relationship prior to this crisis, it will definitely benefit your business now. Although banks are better capitalized than they were in 2008, some will face choices when using their balance sheet capacity. Even those with access to sufficient funds (which the Fed is working to ensure) are likely to be stressed in terms of personnel, time and other resources. Remember, bankers and their operations staff are working from home, too. They will prioritize business customers, even those seeking to use the bank to process requests for government-sponsored loans such as an SBA Economic Injury Disaster Loan (EIDL), based on your banking relationship.
- Communicate – that includes listening. You cannot over-communicate with your bank in this environment. If you typically provide quarterly updates, provide them monthly, starting now. Be proactive – don’t wait for the bank to ask for these updates. Be sure to ask your banker for input. He or she is dealing with many companies that are facing similar challenges and can offer a perspective could be quite helpful. While you don’t expect your banker to understand your business as well as you do, be open to the possibility that he or she brings expertise to the table that can complement your own.
Failing to communicate is probably the biggest mistake we see businesses make in dealing with their bankers. They don’t communicate good news when they should, and they withhold negative news when they shouldn’t. True story: many years ago, we were just starting to work with a new client whose controller, a curmudgeon by nature, was on the verge of retiring. In other words, this gentleman was not inclined to be forthcoming to help us learn about the company’s financial condition. We looked at their recent financials and reviewed the terms of their bank loan and realized they were in violation of certain loan covenants. We knew the company’s CEO was going to be having lunch with the company’s banker and we recommended that the CEO disclose what we had uncovered. Afterwards, the CEO told us that the lunchtime conversation was tense, to say the least. The banker had threatened to initiate action but decided to talk with us first, and we were able to show how we were going to turn the ship around. By being open and honest with the bank, we helped the business to stay afloat.
- Be Prepared. If you are going to seek a loan, be well prepared before you meet with your banker. You need to have a well thought-out request – don’t just go with a “big ask” (e.g., we’re seeking a five-year, non-amortizing term loan equal to last year’s revenues). Instead, show why a specific loan amount for a reasonable amount of time will get you to accomplish X, Y and/or Z, and why you believe you will be able to generate the cash to pay the loan back on time.
Before seeking a bank loan, consider whether the Payroll Protection Program (PPP) and/or an Economic Injury Disaster Loan (EIDL) would work for your business. If not, be prepared to explain why the (potentially forgivable) loan under the PPP is not appropriate or is insufficient for your situation. If you have applied for the PPP and are still seeking a bank loan, be prepared to explain how you will use the funds from the loan to complement the PPP funds. Similarly, if an EIDL (perhaps in combination with the PPP) will not meet your needs, be prepared to explain why, and exactly how the bank loan would used to address funding needs not covered by either of those programs. Or, perhaps you are seeking a short-term loan as a “bridge” to meet payroll while your application for the government-funded programs are pending – if so, explain that you will repay the loan when those funds come in.
- The fine print: companies may apply for PPP loans and other financial assistance from the SBA, including Economic Injury Disaster Loans (EIDLs), 7(a) loans, 504 loans, and microloans. You cannot use a PPP loan to cover the same expenses you plan to meet with other SBA loan(s). For example, if you use the PPP to cover payroll for the next eight weeks, you cannot use a different SBA loan for the same payroll or other permitted costs over that same period, although you could use it for payroll for a later period, or to cover different employees.
- Update your forecasts. Arguably, this is part of being prepared, but we decided it deserves its own category. Before meeting with your banker, update your 13-week and total year 2020 cash flow forecasts as discussed in our recent article, creating both most-likely and worst-case scenarios. Even though there is going to be a great deal of uncertainty in these forecasts, the bank is going to want to know the reality of what your business is facing, and your justification for the assumptions embedded in them. It’s good to be optimistic in some situations, but the emphasis here is on realistic, including downside risk. Put yourself in your banker’s shoes – would you extend a loan to a business that did not provide this information thoughtfully, credibly, and professionally?
Keep in mind that standard approaches to forecasting – trend analysis, regressions, business barometers, etc. – are not useful in the current situation. Look at recent history, where recent means the past two weeks as a starting point, but there will be a great deal of judgment involved as to whether or not that is indicative of what your business is likely to generate over the coming weeks and months. Most important: Incorporate discussions you’ve had with your customers into your outlook so that you can forecast customer by customer, looking at sales pipeline to see which are most likely to come to fruition.
If you are running a small- to mid-sized business and you haven’t already reached out to your banker, we encourage you to do so as soon as possible. Even if your business is in the enviable position of holding up well during this crisis and you do not foresee a need to seek a loan, communicate that to your banker. You and the bank will be glad you did.
P.S. The same notion applies to key suppliers – if you are going to have a problem making a payment on time, if you plan to cut back the frequency and size of your orders temporarily, or if your company is shifting to make essential goods and you expect a surge in demand, communicate proactively and as early as possible.
We hope you found this article useful. G-Squared Partners is helping many businesses work through a variety of financial challenges during this time. If you have issues specific to your company’s financial situation that you would like to discuss, please contact us for a no-obligation conversation.