A relationship to bank on: knowing your client's banker can help elevate your status as a financial adviser.

How to make your banker your best friend or How to stop worrying and learn to love your bank. OK, perhaps the reference to Stanley Kubrick's 1964 black comedy "Dr. Strangelove Or How I Learned to Stop Worrying and Love the Bomb" is a shade obscure. But, it highlights the opportunity you have to assist your clients in their commercial bank relationship.

Commercial credit remains a misunderstood process. Bankers do not adequately communicate to CPAs and clients how and why loans get made and managed. The following are a few frequently discussed topics that will allow you to gain a deeper knowledge of your clients, stimulate discussion regarding their bank relationship and become a more valued business adviser.

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PROPER CREDIT FACILITY

Clients frequently use working capital to finance long-term assets, which creates a balance sheet mismatch and puts undue pressure on cash availability. Also, many companies do not have a line of credit that can be used to meet cash flow timing differences, such as seasonal inventory buildup or taking advantage of vendor discounts.

One of the most common errors small businesses make is using short-term credit to finance long-term purchases. This can affect cash availability to meet payroll, trade debt and tax payments. Matching the term and repayment for the acquired assets allows the company to meet borrowing needs and reserve cash for operations.

THE COST OF EXCESS CREDIT

There is always a cost for excess credit. Annual non-use fees or higher interest rates are the result.

Many clients believe it is important to obtain as much credit as possible because these dollars would be available for unexpected events. While that may be, business owners should know there are identifiable costs paid for that availability.

Each bank will factor non-use fees into its pricing to meet profitability targets if line usage is low. These fees are often assessed quarterly on the difference between the average borrowings and total loan commitment. If the borrower does not require the available credit, a credit reduction will lower non-use fees. These fees are assessed quarterly in arrears. Greater understanding of historical usage is available from the bank and proper forecasting can gauge the client's future needs.

TAKING ADVANTAGE OF ALTERNATIVE PRICING

Short-term fixed rates--often up to .5 percent lower than prime--are an attractive alternative to prime. Find out if these rates are offered at your client's bank and whether your client is taking advantage of these rates. If so, determine if the option is being used correctly.

It is still a buyer's market for creditworthy clients. With today's competition for small and middle market clients (less than $20 million in total credit), a prime rate loan is frequently obtained. Many banks offer alternative London Inter Bank Offering Rate pricing (LIBOR), which can provide additional savings.

The problem here is that if this option is available, it is forgotten or ignored. It takes a little more time for your clients to prepare cash projections, but the payoff can be significant.

Also, with reasonably priced loan sweeps, borrowers do not have to actively manage their cash balances, which can save lots of time.

LOAN LIMITATIONS, ACCESSIBILITY

Loan covenants should allow the company to operate and access its credit facilities, but they sometimes prohibit accessibility of the line.

Where should the loan covenants be set and which ones should be used? There is no specific formula, but a general rule of thumb is minimum liquidity, net worth and leverage ratios.

The liquidity covenant makes sure the company maintains enough of a cushion in its working capital to meet upcoming bills.

A minimum net worth covenant ensures the borrower maintains adequate equity in the business and acts as a buffer against unforeseen losses and "excessive" distributions.

A total debt/net worth ratio protects against a combination of total debt and shrinking equity. If long-term debt is on the books, a debt service coverage ratio should be required to demonstrate the company can meet its long-term obligations with available cash flow.

It's important to keep an eye on these covenants. Often, the banker rolls the covenants year to year without proper attention, which may trigger an inadvertent violation by the client. This can shed a negative light on the borrower with the bank's credit administration and may negatively affect a future credit decision.

FULFILLING THE TERMS OF YOUR LOAN AGREEMENT

If the client occasionally violates covenants, the loan officer must address and obtain credit approval to waive the default, amend the covenant default or call the loan. Late financial statements, reports or tax returns are the most common occurrences.

Customers can distinguish themselves by meeting all reporting requirements without the bank's urging. This will improve the bank's opinion of the client and be beneficial at the customer's next credit request.

A pattern of tardiness in submitting reports may mean unfavorable credit decisions for your client and potentially higher interest rates.

DOES THE BANK KNOW WHO YOU ARE?

Clients may feel well taken care of by their loan officers and the branch staff, but key decisions regarding granting credit, pricing and other products frequently are made by others at the bank.

It is important that the bank's key decision makers--regional and divisional managers, as well as credit administrators--know you and your business. These people make the final decisions whether to grant your client credit.

As it's often said, "A picture is worth a thousand words," or as we bankers say, "A plant tour answers a thousand questions."

Chief credit officers and regional managers enjoy staying in touch with their clients and welcome a look at the business. The best time for this is when there are no credit requests on the table. This allows senior managers a relaxed opportunity to better understand your clients, their industry and how they plan on repaying the bank.

PROTECTING AGAINST CHECK FRAUD

Check fraud is growing exponentially. The volume of checks processed are not individually reviewed and over-the-counter color printers can replicate and doctor vendor or payroll checks. It is not a question of if your client will be victimized, but when.

Check fraud is a billion-dollar problem, but several inexpensive tools are available to protect your client against unauthorized check negotiation.

Many banks provide "Positive Pay" features, which essentially involve your client electronically sending the bank a file of checks issued. When the check arrives for payment, the bank uses this file to match against presented checks. Any check unaccounted for will not be paid without client approval.

Additionally, a visit back to basic internal accounting controls is always time well spent.

Clients have aggressively cut staff during these tough times to ensure profitability, but these cuts sometimes come at the expense of basic internal accounting controls. Internal fraud is rising. Look for ways to meet the needs of the client and protect them against unscrupulous employees.

By introducing yourself to your client's bankers, you gain better insight into their business and elevate your status as a key financial adviser to your client. Also, this will extend your financial network and may turn into a business development opportunity.

BY STEPHEN LOZANO, CPA 

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Stephen Lozano, CPA is vice president and senior relationship officer at Union Bank of California. You can reach him at [phone] or at [e-mail].