CPA, Rodney Davis of GreySuits Inc. a strategic accounting firm was interviewed about how business owners can strategically make the most of the relationship with their bank.
Q: What’s the best way to establish a relationship with a bank?
Rodney Davis: Banks want predictability, confidence and transparency. If you’re going to have a good relationship with the bank, you need to satisfy those 3 conditions. If you can do that even in adverse times, you’re going to find it easier to deal with the banks.
Q: Why is our relationship with the bank so often mismanaged?
Rodney Davis: The difficulty about the relationship between banks and their clients is that banks are absolutely mandatory. So we can forget that we’re a client of the bank, as opposed to in desperate need of their services. So, the relationship isn’t quite set in a balanced way for it to be productive for both sides. It’s almost always productive for the bank, but often it’s not what it needs to be for the client. But you’re a client and if that relationship is going to work efficiently for both sides, the supplier-client relationship should never be lost, and many companies find themselves not acting like a client with their bank.
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Q: When should I start trying to improve my relationship with the bank?
Rodney Davis: There are inflection points in the life of any business, when you should try to establish credit relationships that will serve you well, whether the cashflow suggested it or not. For example, a new business that’s profitable and consistently generating positive cashflow would still want to establish a relationship with a bank. Because if they’re growing, it’s very possible they’ll need resources to finance that growth, and it’s not necessarily the right source of financing to finance long-term growth with short-term operating results.
If you’re using only your operating profits to finance long-term sustainable growth, you may actually be missing the opportunity to better balance the total capital structure of your business, because you never know when you’re actually going to need financing. And the worst time to apply for financing is when you’re desperate for it.
Q: How do I predict whether I’ll need financing?
Rodney Davis: If you’re doing good business planning at the beginning or during your annual business cycle, it should give you a predictor of whether or not you’re going to need cash. The way that you know whether or not you’re going to need financing is by carrying through the operating and capital requirements of your business through to a projected balance sheet. Because that will tell you if you’re going to have periods during the year where you might have cash crunches, and puts you in a position to start negotiating ahead of time to put facilities in place to meet those cash crunches.
Q: Is it wise to use your own personal credit?
Rodney Davis: I think you try as much as possible to separate your personal life from your business when it comes to financing, credit and anything else that might put your home at risk.
But there are times when it is not only good, but necessary to put personal guarantees on the business. Especially if that’s the only way that the bank will take the risk on you. Because if you’re not willing to take a risk on your business, why should they? You should only guarantee your business as long as you have to.
Q: Is it important to have a financial advisor in these conversations?
Rodney Davis: I would recommend that if you’re in any kind of meaningful financial discussions with your bank as an entrepreneur, unless you have a financial background, I would think it would be wise to bring somebody who can speak bank-speak. It really is important that you take your relationship with the banks seriously. I know a lot of clients who don’t even know their business banker and they’re proud of it because they say they don’t need the bank for financing. You should always know who your banker is.
Rodney Davis, CA, CPA is a partner and practice leader at GreySuits Advisors Inc. He has been working with private and public organizations since 1990 in change management.
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