“Both sharks and bankers are good at the kill shot, but they’re happy to let their victims do most of the work.”
If you believe the enticing advertisements, the softest caress comes from your compassionate banker. In business, the relationship between lender and borrower is as old as time. It is a relationship that runs the spectrum, from symbiotic at one end to parasitic at the other. Most business owners don’t dislike their bankers; in fact they probably like them. But they hate their banks. Your banker is someone who breathes the same air as you, someone you know, whom you may meet with occasionally, and who has your best interests at heart, maybe. The bank on the other hand is a faceless institution, built on mysterious rules and is the guardian of immense wealth. Your banker is the face of that institution, constrained by the rules and practices that determine who gets the loan and who doesn’t. Your banker rarely makes the final decision. The decision is made by a set of changing criteria which the borrower must meet. As a borrower, you are generally not privy to those lending criteria. It is therefore up to you to make your best deal before you accept the loan, because the terms you agree to at the outset may come back to bite you when you can least afford the distraction.
The borrowing transaction is like any other. It is a negotiation, which leads to a contract. From the bank’s perspective, each borrowing transaction should follow a singular path, consisting of application, security and terms. The bank would like you to log onto their site, fill in the online application, send it along with some back up, and if it fits the criteria you get the loan. Easy. In a perfect world, the bank does very little and technology does most of the work. All the bank has to do is bait the hook. Most transactions at a retail level fall into this simple model, which makes good sense. The bank could not employ enough account managers to meet with every applicant on every loan. It’s an assembly line that generates a huge amount of good business for the bank. What you need to remember as a borrower is the attention you get from your bank/banker is directly proportional to the size of the amount you are borrowing. If you apply for a modest limit credit card online, your interaction with the bank will be limited, perhaps to a phone call, if that. If you apply for a business loan in the high six figures, you’ll probably meet at least twice with an account manager, and at least annually for a review. So the more you borrow, the more frequently you’ll see your banker, probably.
Business borrowing seldom fits neatly into a box. Every business owner is different, just as every industry has its own peculiarities. As a business owner and decision maker, when you enter into the borrowing transaction you need a plan. You need to know how you’ll use that money. You need to know, before you borrow, how you intend to repay the debt. You need determine if you can afford the debt, and whether you’ll be able to pay the interest if the expected returns don’t materialize on time. You have to look at worst case, as well as best case, and decide whether you can live with and survive through the worst case result.
You can mitigate some of the worst case scenarios by structuring the terms of the loan at the outset. Remember, it is still essentially a negotiated transaction and there are many lenders and there are many terms to a loan which may be modified. You can negotiate the cost of borrowing based on risk or lack of it, based on ongoing reporting to satisfy your bank that your plans are paying off, the quality and value of your security, how the money is being used, and even the liquidation value of the assets if things don’t work out, among many other factors. Perhaps you can negotiate something less than an unlimited personal guarantee whereby the bank gets everything in the world that you own if you are unable to repay. Although the bank would like you to believe that they are your only solution, there are many banks and many lenders. Although the bank would like you to believe that there is no flexibility in the borrowing transaction, there is in fact much room for creativity and latitude. That’s a lot for any business owner to handle. It’s helpful to include your accountant and lawyer at the outset, to navigate through this transaction so that it meets your needs and is structured to provide you with safeguards. You need protection to ensure you get a deal that you can live with even if things don’t work out perfectly. It’s easier to negotiate with a hungry minnow, than an angry shark.
I would love to hear from you and invite your questions and comments. You can reach me by e-mail at firstname.lastname@example.org. With three decades of experience as an accounting professional, consultant to small business and business owner, there may be a few things I can help you with. Call me. Best wishes, Sid.