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The care and feeding of your banker in turbulent times.

In these tough economic times, more businesses are finding themselves increasingly reliant on the support of their bank.

Although past relationships with the bank may have been positive, with few problems encountered if an increase in the line of credit or its terms was requested, a similar request today may receive a very different reception.

During the past few years, bankers were looking for places to lend money and attempting to increase assets. The bank's objectives today are quite different. Credit policies are much tighter and lending situations are being carefully reviewed to assure adherence to new credit standards which have been established.

Given this increased scrutiny, how should a company approach the bank if the company is worried that the approach might cause the bank to re-examine the relationship? As with any relationship, it's important to understand the bank's objectives, expectations and interest.

You must be truthful and realistic. Don't structure a plan to show the bank what you think it wants to see. Put down what you honestly believe to be likely, given the current situation. If a plan is unrealistic, the battle may be won, but the war lost. It will become apparent quite quickly that the plan is not achievable and the bank will be less inclined to continue its support, due to concerns over the credibility of any subsequent explanations or plan.

When presenting any proposal remember the bank will be looking to the principals of the company for an indication of their ongoing commitment. This may be in the form of an equity injection into the firm. If this is not possible a guarantee, or partial guarantee, of the bank's increased exposure, supported by personal assets may be required, or a reduction on owner compensation may be suggested until the problems are resolved.

Rule Two is to respect the covenants of the loan agreement. Don't do the various things you have agreed not to do and do the things you have agreed to do. Don't repay shareholders' loan if this is restricted. Do provide financial reports and other information, when required.

It may be useful to also provide an explanation of the numbers to put them in proper context. If sales have dropped, margins decreased or expenses increased, explain why. In addition to providing useful background information it also gives the bank confidence that you are monitoring things and are generally on top of the situation. Rule Three is to use the operating line of credit for its intended purpose -- to finance current operations. Don't buy equipment or other fixed assets with it as that will remove those funds from the company's use. If you need equipment, finance it with a term loan. If an acquisition of another business is being considered, finance it through a combination of long-term debt and equity. The revolving operating line should be reserved for running the day-to-day operations.

Banks and bankers have important roles to play in the support and financing of business operations and they are, for the most part, prepared to assist companies through difficult times.

It is important, however that: a) users appreciate the bank's role and needs; b) the perception of intelligent, committed, and reasonable management be reinforced; and c) the lines of honest and straightforward communication are kept open.

Ted Anderson is a Manager in the Finance Department and Ralph Goldsilver is a Partner at Mintz & Partners, a Toronto-based firm of chartered accountants.)
COPYRIGHT 1993 Canadian Institute of Management
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Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Publication:Canadian Manager
Date:Mar 22, 1993
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