Your bank line of credit is a critical tool for managing your business. Whether you use it for daily operations, strategic business improvements, or as your emergency fund to cover unplanned cash needs, it pays to keep your line in good standing.
Understanding how your bank views your business and how to best manage your bank relationship are keys to keeping your line healthy. Below are four ways to ensure that you and your line of credit are on solid footing with your bank.
Understand how the bank views your relationship
If you are like most dealers, you feel you have a good working relationship with your bank. You’ve done business with them for years and periodically get together with your banker over dinner or beers to talk things over. You are friendly with one another, and may even be personal friends. You’re confident that if times get tough or you need help, your banker will be there to support you.
Unfortunately, it’s not that simple. Having a good working relationship is helpful, but banks are complex organizations. Your banker reports to people who likely don’t know you or your business personally. The members of the bank’s credit committees are purposely insulated from your relationship.
Your line of credit is also not the only asset the bank owns. How the bank is performing overall and how you stand in relation to other bank assets impacts the decisions they make on your request for a larger line or the consequences if you violate a covenant. So it’s important that you understand what your bank is sensitive to and how your line of credit is viewed more broadly within the bank.
Know how the economy and growth impact your bank’s lending approach
A bank plays a role in virtually every dealer success story. However, bank incentives for lending are not always perfectly aligned with what dealers need. When the economy is good and risk is perceived as low, banks are seeking to lend more whether you need more line or not. When the economy is bad, banks reduce risk and tighten lending standards, which is when dealers’ cash flow needs are more acute. Many dealers experienced this the hard way during the Great Recession.
Even more confusing is how banks often view opportunities for rapid growth. You may see an acquisition, the opening of a new location, or landing a large new builder as a big win, but the bank may be more circumspect about expanding your line of credit to support these things. Rapid growth often presents new uncertainty, and uncertainty can be viewed as higher risk. Do your best to keep your bank informed and involved ahead of time on these kinds of change—they’ll appreciate the heads up. Plus, you’ll be in a better position to know whether you’ve got the line you need to make it happen or if there is a concern you need to address.
Make the bank want you
Banks love lending to businesses that are stable, well-run, profitable, and where there is collateral as a back-up if something goes wrong. There are several actions you can take to strengthen the attractiveness of your business.
Management: You should be knowledgeable about your company history, your financials, and your operating plans for the future. Banks also want to be confident that your staff knows how to manage the business and will also likely conduct criminal background checks on key people at your company.
Professional systems: Good systems are as important as good people. If those people aren’t there, will the operation run as it should? Banks like it when your inventory, accounting, credit, HR and other areas are professionally managed—either by qualified staff or with a partner company. This approach creates stability and sustainability for these important functions.
Collateral: The more solid your collateral, the more comfortable your bank will feel about keeping or extending your line of credit. Banks view adding equity into the business very favorably—it boosts the amount of collateral and is a sign of your confidence in the business.