Negotiating with your banker is not a zero-sum game – meaning that your banker doesn't have to lose for you to win. Here's why that statement is both important and true.
Prospective borrowers entering into one-dimensional lending agreements are rarely best served. Let me explain. A credit facility offering the "best rate" for an “inadequate term” will always yield a sub-optimal solution and conversely, an “ideal term” at an “above market rate” results in similar disappointment for the borrower.
So how do we get to a banking agreement that approximates the optimal outcome and why is that important?
First of all, approaching an upcoming request for credit with an intent to establish a relationship is more important than "winning" the negotiation of a single transaction. Why is it more important? Simple...today's bankers utilize sophisticated risk management practices designed to stand the test of time. In a sense, bankers are looking to extend credit to borrowers (clients) under facilities that are more akin to a marriage (“relationship”) rather than a speed date (“transactional”).
A careful review of your credit history, business plan, financial statements and cash flow projections will help bankers understand most key risks of your business and its industry. A bankers' ability to propose "the" right banking solution is highly dependent on them spending time with you to understand likely cash flow requirements, which may or may not match up with your initial financial request (undercapitalized businesses fail quicker than any other kind of business). A good banker will ask whether you have considered both operating and capital cash flow needs, seasonality, your procurement process, supply chain management, payroll commitments, etc. They will also consider whether your cash flows are likely to be lumpy and whether key customers are known to pay late.
Regardless of what type of business you run, your best customers get one of two things: either best pricing or best service. It works the same for bankers. They spend more time with their best clients and provide better banking solutions at best pricing to those same clients. So how do you become a desired client who is entitled to this preferred level of service and pricing?
The bankers I deal with consistently tell me the same thing, they are looking to work with businesses and management teams that have growth history OR growth potential. They prefer dealing with strong management teams who are supported by competent external advisors. Bankers know the most successful businesses are the ones who most quickly identify and respond to market changes, tax changes and periodic banking requests.
Bankers like working with borrowers who are upfront, organized and attentive. As trusted advisors, we play a valuable role in helping our clients elevate their relationship with their banker to “preferred client” status. We help our clients gather and present financial information for business plans, financial statements and cash flow projections in a manner that helps bankers respond to client credit requests. If we are unorganized, slow or unclear in the delivery of our work, it directly impacts a bankers’ ability to recommend appropriate and timely banking solutions.
Bankers do not want clients who are unnecessarily forceful/demanding, nor do they want to deal with clients who are habitually late responding to financial or information requests. They do not want clients who leverage one bank against the other for better rates.
So, the next time you are preparing to change your existing financing, consider working exclusively with your current primary lender. More often than not, this approach will yield a credit solution that is integrated, practical and cost effective. Juggling the needs and requests of multiple lenders adds unnecessary complexity and cost to your finance activities that go well beyond the rate quoted on your next line of credit!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
