Michigan State University Extension
Tourism Educational Materials - 33119708
06/06/02
Working With Your Banker
Source: University of Missouri - Rolla
Author: Amos, John M.
ID:EP-89
Year: 1981
ESTABLISHING AND MAINTAINING RAPPORT WITH YOUR BANKER
Banks are in the business of lending money. Loans to
small business owners constitute a significant part of
most bank investments. A business owner should realize
that his banker wants to work with him and will go to
great lengths in helping him work through his problems.
However, a business owner cannot wait until he is
"going down for the third time" and expects to receive
quick and thorough assistance. A relationship between a
business owner and his banker must be established to
identify small problems and tackle them before they get
out of control.
Who should develop such rapport? It can be stated that
all businesses, both large and small, should develop a
working relationship with their banker because of the
invaluable assistance only he can offer. Even well-
capitalized firms will eventually need such an
effective working relationship. We cannot predict when
the problems or the opportunities requiring financial
assistance will come along, so the best hedge is sound
constant rapport with your banker.
Since it is necessary for a firm to establish and
maintain a working relationship with a bank, the next
question is, "How do we go about it?" There are a
number of steps a business owner should follow in order
to do this. The following are offered as suggestions.
1. Establish a credit history with the bank. Borrow
funds for short periods and repay promptly.
2. Establish a checking account and maintain an
adequate balance to cover all checks. Do not write
checks that may be returned because of insufficient
funds. Find out what size of checking balance the bank
considers adequate.
3. Find out what types of customers the bank is
interested in serving. Is your firm too small or too
large? Most small businesses need small banks as it is
more difficult to get the same level of attention in
large banks.
4. Get to know the bank and its employees even if you
do not need them now. Invite your banker to your
business establishment on a regular basis. Introduce
him to your key employees. This will help him gain
confidence in both you and your staff. This step is
very important.
5. It is not uncommon for the business owner to have
one or two contacts with his banker per week. Keep your
baker current on all phases of your business. Share
your plans and dreams with your banker.
6. Be honest with your banker as the truth always comes
out. Don't try to cover up.
7. Don't surprise your banker. If you foresee problems,
tell him. He may have a solution or, if a problem does
occur, he will be prepared to help.
8. Do what you say you will do. This means you should
not be overly optimistic about forecasts. If you cannot
make projected sales or payments, tell your banker well
in advance.
9. Provide your banker with adequate records on a
regular basis. In the beginning provide balance sheets,
income statements and cash flow analyses for the past
three years and a summary of the history, management
experience, and products of your business. Know and
understand your accounting records.
10. Have the best CPA and attorney that you can afford
and communicate with them. Introduce them to your
banker. The four of you can make or break your
business.
Another question is, "When should you change banks?"
Before changing, have a good reason, such as your needs
have grown considerably. A solid relationship is more
important than a point or two of interest. If you are
uncomfortable with your established relationship,
rather than change banks, request a new personal banker
be assigned to your account who may be more compatible.
It is also important to establish and maintain a
relationship with another bank in the even that
problems arise which need immediate attention and your
regular banker is not available. As time is generally a
critical factor in most financial situations, the
second bank will know about your business and be able
to respond immediately.
Some common rules to follow:
1. Select your bank and banker carefully.
2. Insure that your banker knows your business.
3. Stay with the same bank, if possible. Consistency
is important to bankers.
4. Don't surprise your banker.
FINANCIAL SITUATIONS THAT ARE INAPPROPRIATE FOR BANK
BORROWING
All businessmen have run across bankers that say NO to
their request for funds, even though they know their
project is worthwhile. The question is, "Why do bankers
say no?"
First, the borrower must understand that there are two
basic types of banks: retail and commercial. The
retail-oriented bank does considerable advance work and
promotion to attract customers and is involved in
installment loans, car financing, passbook accounts,
etc. On the other hand, the commercial bank caters to
the business firm. The commercial bank operates with
purchased funds, such as certificates of deposit,
bankers acceptance, etc., while the retail banks use
savings accounts, money market certificates, etc., for
their sources of funds. For commercial banks' demand
for funds drives the need for funds, which is not as
strong for the retail banks. Consequently, the
commercial banks have a higher interest rate structure.
Today, neither type of bank wants fixed-rate loans
(loans at a given interest rate for long period of
time) because the cost of funds is constantly changing
in the money market. Basically, banks decline to make
loans because the risk involved is greater than is
prudent to the bank. Loans that are inappropriate for
banks to make are:
1. Loans for venture capital to firms.
2. Loans to firms or individuals with no experience in
business or inadequate capital structure or no
capital of their own involved.
3. Loans that have one source of repayment, such as a
typical retail operation.
4. Loans to companies and individuals with questionable
business practices such as unauditable accounting
records or no accounting records, or secured by a
large CD only.
5. Loans to firms that do not have a good track record.
6. Loans to firms with heavy reliance on personal
guarantees as banks are not liquidators. Banks want
loans secured but do not want to be dependent on
sale of these assets to be repaid. The goal of a
bank is to have adequate margins, but they need to
make loans on income-producing activities.
7. Loans to provide equity capital business.
8. Loans without adequate information about the
business, incomplete accounting records, and no
background information about the industry.
9. Loan requests that are based on projects which are
not supported by past performance of the firm.
10. Loans that are secured by securities for which
there is not an established market, or loans that
have a heavy reliance on second and third
securities.
The bank's refusal to make a loan depends on the degree
of risk involved as they are concerned about the
repayment of the loan's principal and interest. The
businessman requesting a loan must be concerned about
the type of bank with which he is dealing and if his
loan request is appropriate for that type of bank.
COMMON RULES OF THUMB THAT BANKERS USE
1. New ventures must have at least one year's operating
capital.
2. A large percentage of sales to any one customer
causes a banker concern. Banks would rather you
sell to many small accounts than a few large ones.
3. Do not want to make loans that depend on sale of
assets (secured) to get principal back.
4. Loan must be on activities that generate funds.
5. Poor checking account balance tells how a firm is
performing. Small balance indicates problems.
PREPARATION AND PRESENTATION OF A LOAN REQUEST
Banks are in the business of making loans and they have
a need to make loans to firms. Therefore, the firm must
sell them on their needs or they must have a strategy
or plan; the firm must have something to sell. One key
to a successful loan request is to get acquainted with
a banker before a loan is requested. Another is to
follow these steps in the preparation and presentation
of a loan request:
1. PLAN. What is the objective? How will the objective
be accomplished using the proceeds of the loan.
2. PREPARE. Banks will tell you what must be included,
usually the past financial history of both the
company and the principal owners and managers.
3. PACKAGE. A well prepared written document is needed.
4. PRESENT. An oral presentation should cover the
highlights; this is "selling."
Any loan request should answer the following questions:
- Why does the firm need the funds?
- How much does the firm need?
- How and when will the funds be repaid?
- Can the firm afford the cost of the funds?
In preparing the loan request the firm must understand
what the bank needs and uses in loan analysis, such as
the 5 C's of credit:
CHARACTER: The trust and confidence of the firm's
management and ownership.
CAPACITY: The business and management capacity of the
firm - can it take on added responsibility?
CAPITAL: Amount of funds the owners have invested in
business - is it a sufficient amount?
COLLATERAL: What is the secondary repayment plan of the
firm? However, all the collateral in the world will not
make a bad loan a good one.
CONDITIONS: The state of the economy, rate of
inflation, tax policy and changes and state of the
industry.
In the analysis of a loan request the bank needs the
following information:
1. History and nature of the company.
- when it was formed and why
- type of organizational structure
2. Management personnel.
- background, personal biographies
- type of individuals
- style of living, where they reside, personal
balance sheets
3. Nature of company's operations
- product line
- marketing operations
- labor force
- competitors
4. Condition of company's premises.
- buildings
- equipment
5. Trade experience in the context of the proposed
request.
6. Conditions within the industry: both the economy and
degree of technology indicating the state in the
technology cycle the industry falls into.
7. Government regulations and anticipated "red tape."
8. Opinions of what others think of the idea or plan.
9. Accounting records. Banks prefer accounting records
for the past 5 years or, if firm has been in
business less than 5 years, accounting records from
its beginning, including balance sheets, profit and
loss statements and cash flow projections vs. Actual
income and expenses.
10. Any outstanding lawsuits.
11. Full description of the firm's inventory and
estimates of any items judged obsolete.
12. Any liabilities.
13. All leases or contracts.
14. A list of accounts receivable, by age, and changes
for collection.
15. A break-even chart.
16. Ratios, such as, current ratio, quick or acid test
ratio, debt to capital, fixed assets to capital,
inventory to working capital, etc. These ratios
should be compared to ratios of the industry and
any significant deviations should be explained.
In the actual presentation the firm must show that the
bank needs to make a loan. The loan request must be
neatly prepared, typewritten, with a cover letter. The
loan request package must be complete and provide all
necessary information; otherwise, the bank will request
the additional information, delaying action on the
loan.
OUTLINE OF A LOAN REQUEST PACKAGE
Cover letter
Title cover sheet
Table of contents
I. Summary
A. Nature of business
B. Amount and purpose of loan
C. Repayment terms
D. Equity share of borrower (debt/equity ratio after
loan)
E. Security or collateral (listed with market value
estimates and quotes on cost of equipment to be
purchased with the loan proceeds; best if appraisal
by an outsider can be provided.)
II. Personal information (on all corporate officers,
directors, and any individuals owning 20% or more
of the business.)
A. Education, work history, and business experience
B. Credit references
C. Income tax statements (last three years)
D. Financial statement (not over 60 days old)
E. Background and type of personnel; where they live
III. Firm's operations
A. Nature of firm's operations
- Product line
- Equipment type and condition
- Labor force
- Buildings - type and condition
B. Marketing
- Experience in market
- Organization and sales force
- Sales history and forecast
- Economic conditions in the industry
- Major competition and share of market
C. Full description of the firm's inventory
D. Government regulations and anticipated regulations
E. Description of outstanding lawsuits or legal claims
and liabilities
F. Aging of accounts receivable
G. Firm's accountant and its attorney.
IV. Firm information (whichever is applicable below -
A,B, or C)
A. New business
- Goals and objectives of firm - strategy
- Life and casualty insurance coverage
- Lease agreement
- Partnership, corporation, or franchise papers, if
applicable
B. Business acquisition (buy out)
- Information on acquisition
- Business history (include seller's name, reasons
for sale)
- Current balance sheet (not over 60 days old)
- Profit and loss statements (preferably more than 60
days old
- Business's Federal income tax returns (last 3 to 5
years) and those of principal owners, if possible
- Cash flow statements for last year
- Copy of sales agreement with breakdown of
inventory, fixtures, equipment, licenses,
goodwill, and other costs
- Description and dates of permits already acquired
- Lease agreement
C. Existing business expansion
- Goals and objectives of firm - the strategy
- Business history
- Current balance sheet (not more than 60 days old)
- Current profit and loss statements (not more than
60 days old)
- Cash flow statements for last year
- Federal income tax returns for past three to five
years
- Lease agreement and permit data
- Life and casualty insurance
- Partnership, corporation, or franchise papers, if
applicable.
V. Projections
A. Profit and loss projection (monthly, for one year)
with explanations
B. Cash flow projection (monthly, for one year) with
explanations
C. Projected balance sheet (one year after loan) with
explanations
VI. Ratio analysis
VII. Break-even analysis
VIII. Repayment plan: Complete description of how funds
will be repaid by firm and alternatives if funds
are unavailable.
Prepared for the UM Business & Industry Extension
Program.
An Equal Opportunity Employer
12-81-D EP-89
This information is for educational purposes only. References
to commercial products or trade names does not imply
endorsement by MSU Extension or bias against those not
mentioned. This information becomes public property upon
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