While working with privately-held businesses, we have the opportunity to observe the interactions that our clients have with their lenders. Most clients fully recognize that lenders often provide the lifeline to the company, enabling access to capital to purchase property and equipment and inventory, hire employees, and ultimately expand the business.
The most successful businesses understand that maintaining good relationships with their lenders is a wise business strategy. They perceive the lender as a partner in their business and, consequently, maintain an open dialogue. In speaking with middle market lenders, I have learned that this is the relationship they desire. Below are four tips to foster a strong relationship with your lender.
- Communicate frequently. Lenders, like many of us, generally do not like surprises. Therefore, keeping your lender up-to-speed on what’s going on in your business is critical to a successful relationship. The best lenders do a good job at keeping in touch with their clients to make sure this is happening, but it’s even better when senior management is proactive about reaching out to give their lender advance notice about any material events or changes to the business.
- Create a mutually beneficial relationship. Banks are in business to earn a reasonable return. Pushing your bank to squeeze the last dollar or treating them like a vendor is not a way to create a mutually beneficially relationship in which both parties are vested in each other’s success. In many cases, the bank is providing the capital to allow the business owner to grow the business at a faster pace than he or she could on their own without outside capital. When the bank feels good about its relationship with a business, they are more likely to manage through a tough situation. In today’s competitive lending market, loans tend to be a loss leader. Rewarding your bank with ancillary business (cash management, deposits, credit cards, etc.) when they support your business with capital is important. Additionally, most banks look at the broader relationship when pricing a loan, so doing more business with your bank will help you get the best rate.
- Read (and understand) your loan agreement. We know it’s long and contains a lot of legal jargon, but it is incumbent upon borrowers to know what’s in their loan agreement, particularly the financial, affirmative, and negative covenants. Again, a good relationship manager will make sure you understand these, but as the borrower, you are signing the loan agreement so you are agreeing to stay in compliance with all the terms included. It’s best to designate someone to be in charge of monitoring compliance with the loan agreement. In addition to the trailing twelve month calculations, companies should also be thinking about the next four quarters – will I be in compliance based on my projected performance? While businesses typically understand their financial covenants, what about the negative covenants? Are there limitations on acquisitions? Or capital expenditures, or distributions? Knowing these limitations and seeking approval from the bank in advance is critical to maintaining a long-term relationship.
- Offer referrals. If your relationship manager is doing a good job for you and you think he or she can be useful to other businesses you are connected to, make a referral! Your relationship manager will be very grateful and it will help build your relationship. It will also push them to go above and beyond to make sure you are having the best experience possible at the bank.
Careful consideration of these four items will ensure a positive and fruitful relationship with your lender.
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