Those Who Have the Gold

To make matters worse, most business owners don’t understand leverage, or why more debt equals more risk. And they tend to overstate their optimism, and understate their need for capital. And they’re usually undercapitalized and overextended. And they rarely have accurate, timely information. But they do have an almost religious belief that things will be all right if they can just get “the funds they need” to get “over the hump.” Sound familiar?

Of course, borrowing is a two-way street. It’s not just a case of business owners needing bankers; bankers need their business customers just as much. For banks, their deposits are liabilities, as in “demand deposit” accounts. Banks don’t make any money until they make a loan. Find a banker who’s never made a bad loan and we’ll show you a bad banker.

On the other hand, show us a banker who’s made too many bad loans and we’ll show you someone who now has a different career. (The classic advice for young bankers who want to be successful is this: “Make good loans.” How do you know if a loan is good or not? “Experience.” How do you get experience? “Bad loans.”)

One of the things many bankers also discover is that the way to get ahead was not by doing good things, but rather by not doing bad things. Thus, the easiest thing to say is “no.” Bankers can become skeptics, then it becomes the business owner’s job to give them a reason to say “yes.”

With these realities in mind, let’s examine some of the things you can do to strengthen your banking relationship and increase your “bankability.” Banks generally evaluate your loan request using the “five C’s of credit.” They are:

1. Character: you must be trustworthy and have a good name; otherwise, how good the deal is won’t matter.
2. Capital: don’t look for 100% financing; expect to invest some funds yourself. (skin in the game . . .)
3. Collateral: what assets are available as a secondary source of repayment (just in case)?
4. Capacity: you must understand your company’s ability to absorb and repay debt. (financial skills)
5. Conditions: what are the general economic conditions and in what ways will they affect your industry and your company? (shaky recovery)

Since the bank really depends almost entirely on you, the more you look like you know what you’re doing, the better off you are. Coupling this knowledge with an understanding of the way banks operate can create a winning combination in getting what you need at the bank.

To test whether or not you’re adequately prepared, always ask yourself these five questions (which are the ones most bankers want answered before they’ll loan anybody anything):

1. How much do you need?
2. What will you do with it?
3. When will you pay it back?
4. How will you pay it back? (That is, what will make cash flow?)
5. What if something goes wrong?

If you can answer all of these questions, you’re ready. Then keep in mind the old Boy Scout motto: be prepared. And, be mindful of the advice from a senior credit manager at one of the larger Midwest banks: 1) keep in mind that borrowing is a privilege, not a right, and 2) know your numbers — or stay home!