How to be a Good Borrower in a Bad Economy

by Mary Stanczak, KUSBDC Business Consultant

If you have ever applied for a small business loan then you probably agree that the process can be accurately compared to a circus poodle jumping through a series of hoops. If you are lucky you will just have to measure up to high credit standards, prepare the “Plan” of all business plans, sign over your house, boat, dog and maybe even your cat as collateral, and cough up large sums of cash for closing and legal fees. But what happens after you close on the loan, get the money, and start spending?  Is anyone watching over your shoulder and paying attention to how you spend the loan proceeds or are operating your business?  Are there more tricks for you to perform?  The answer to these questions is yes. 

Right now interest rates have hit a forty-year low.  It is an ideal time to borrow money to start a business, inject cash into a business, or simply refinance a current business loan to reduce debt payment. As a result of the slow economy, banks are eager to lend money.  However, with a slow economy comes not so great P&L’s for some businesses making it difficult for them to borrow and causing banks to review existing loans more closely. 

So how do you make sure you comply with the loan agreement that you are about to sign, just signed, or signed some time ago?  In addition, how do you manage your relationship with your lender to keep your standing with the bank exceptional?  This article provides you with pointers and tips that will keep your banker happy so that they will lend you money or not become inclined to recall your existing loan during this economic downturn when debt equity is essential for business survival.

Let’s first deal with compliance.  It is important to understand that the documents you signed at your loan closing are not to be taken lightly.  Don’t assume you can take the money and run.  Your loan agreement will spell out the rules you are to follow.  The covenants could include requirements that require you to purchase a specified amount of insurance, limit owner’s withdrawal, maintain predetermined financial ratios, and obtain permission before selling or acquiring new assets, taking on additional debt, and selling the business. It is crucial that you understand the covenants contained in the loan agreement. I recommend highly that your attorney review your loan agreement and that you understand the covenants before you sign on the dotted line.  Negotiation of terms must take place before you close.  Banks will continuously audit and review your loan account and business operations to insure that you are adhering to your agreement up until the loan matures.  It is critical that you pay attention to what you sign and make business decisions that comply.  If you foresee a deviation to the covenants you should contact your banker and request a variance.  

The paperwork does not stop at the loan signing.  Just as banks make sure you are following the rules, regulators audit bank loan records to ensure they are as well.  Banks require borrowers to submit financial statements as part of their review. These statements maybe reviewed monthly, quarterly, and/or annually depending on the banks requirements. Borrowers should submit financial statements and information as requested by the lender in a timely manner.  By doing so the bank's records will be current.  When bank records are current, bank regulators are happy.  If information will be late due to an unexpected or uncontrollable reason then it is wise to communicate this to your lender immediately.  I recommend that you provide your lender with a valid reason for the late submittal and reasonable time frame as to when they should expect to receive the request information. 

Compliance is not the only thing that keeps you in good graces with your lender.  It helps if you and your banker establish a good relationship.  Did you ever have friend or know someone who would only call you when they needed something or had a problem?  If they answer is yes, them you probably know the degree to which you felt inclined to help this person.  Don’t just rely on your banker when you have a fire to put out or a complaint to make.  Just as with any good relationship, it takes effort and communication.  If you want to build and maintain a good relationship with your lender, I recommend having face-to-face meetings with your lender at least quarterly. Invite your lender to come to your business site for annual visits. The visit should give your banker a good indication of how well you run the business.  Also, don’t come across as argumentative or demanding when making a request. One of my favorite adages is “you always catch more bees with honey.” It never hurts to be persistent and expect quality service, but always be professional.  Treat your banker as a valued customer. 

Keep in mind that the banking environment is volatile and bankers don’t always stay at the same bank for very long or they get promoted within the bank, so you may be assigned to a new lender.  Don’t feel like you have to start from scratch, because you will be starting with a good reputation and the respect of the bank.  The new lender will be ecstatic to service a non-problematic account. If you decide to do business with a different bank, most likely one of your former lenders will be on the loan committee giving you an advantage of having a personal contact.  

Always provide lots of lead-time when making a request from the bank.  Start all major projects ahead of their due date.  If you continuously put pressure on the bank to meet unrealistic deadlines you will be sure to irritate the lender and eventually become an unfavored customer. Remember that you are not the only customer the lender serves.  Furthermore, most lenders have stressful positions that pressure them to generate new clients, service and maintain existing accounts, review new loan proposals, and meet business banking account goals.  

Keep the IRS happy by paying taxes on time and in full.  Take paying your taxes seriously. Your ability to borrow and the status of any existing loan can be affected if you neglect the IRS.  The IRS has the power to take collateral away from a bank in circumstances of severe delinquency.  Your risk rating will increase with the bank if you experience persistent tax turbulence.  Adopt and maintain good business ethics.  Lenders don’t approve of skimming.  Skimming is illegal tax evasion.  It is a common practice used by cash based businesses to reduce income tax liability.  Honest bankers only approve of minimization of taxes through legal means. Your lender will compare your IRS tax returns to your internally generated financial statements.  If there are discrepancies, be prepared to explain the difference. Lenders will accept differences that occur where standard accounting practices were applied.

Keep a watchful eye on your checking account balance.  Diminishing or consistently low balances can be a red flag of business trouble.  Avoid overdrafts and drawing on uncollected funds. These are also warning signals that your in business is on shaky ground. Lastly, pay your commercial loan, business debt, and personal debt on time.  Maintain a squeaky-clean credit report. Your lender my conduct periodic credit checks to verify that your credit score is acceptable and debt ratio is in line with bank standards.   If you find yourself falling behind with payments, do not avoid or hide from the situation.  Your bank is certainly not going to forget. Be forthcoming at all times. Your bank will be more appreciative and have more confidence that you do not intend to default. 

So the hoop jumping turns into an entire juggling act. In today’s economy the typical business needs a supportive bank and lender in their audience.  Therefore the show must go on!

-I wish you continued business success!