Commentary: How to talk to a banker

You might not think that now is a good time to write about how to negotiate with your bank, but there are several signs that before 2010 is over, the current tight credit situation will be easing. So it’s not too early to begin planning for the renewal of your banking relationship.

Banks have plenty of money and need to lend it to be profitable.

Arecent survey by the Federal Reserve shows that the number of banks easing terms is about equal to the number tightening them.

The building materials industry is on the rebound. To paraphrase Charles Dickens: It was the worst of times, but we are heading for the best of times. Well, maybe not the best of times, but certainly better times.

The industry is not as toxic to bankers as it was over the past three years.

During the worst housing recession in memory, many dealers strengthened their balance sheets, despite hits to their P&L.

Having said all that, don’t assume that renewing your bank line will be a cakewalk. However, there are things you can do to make the process go more smoothly.

Communicate frequently with your banker. Are you planning to hire additional outside salespeople? Rearrange your store? Increase or decrease your emphasis on product categories? Take market share? How? From whom? You may not think your banker is interested in these or that he might not even understand what you are talking about. If he isn’t, he should be. If he doesn’t understand, what a great time to educate him. Plus, you have to have your act together to make your case. The process of putting this plan together will cause you to think every aspect through thoroughly.

I know one dealer who put together a PowerPoint presentation showing his company’s history along with his plans for several years out. The whole point is to instill confidence.

Start the process well before your renewal date so you have plenty of time to make your presentation to at least three banks, and don’t be afraid to let them know you’re shopping.

Despite all your preparations, expect to pay more for the bank’s services.

The near-death experience that the banking system just went through caused banks to increase their capital-to-loan ratio, which means their cost of money went up. In turn, they will raise rates and fees. Interest rates could easily double or more. Expect standby fees or unused line fees.

I have spoken with many dealers over the years who loathe having to pay the bank a fee for not borrowing against their line. I’ve even seen situations where the dealer didn’t take the full amount that his security earned him. Most banks will establish a line based on 75% of accounts receivable under 90 days old and 50% of inventory. Let’s say that calculates to $2 million, but you think that your needs next year will top out at $1.5 million. Don’t be tempted to settle for the $1.5 million to save the 25 basis points or less for the unused fee. If business costs and commodity prices continue to climb, you might need that additional $500,000. If you go back to the bank, you might be asked for additional security. So look at the fee for the unused line as insurance. The bank has to keep reserves with the Fed based on its total commitment, not just what it lends you, so these fees have a certain legitimacy.

Try to negotiate a multiyear package, even if it means giving the bank some leeway to increase rates after the first year. Once you have a two- or three-year contract, you’ve eliminated worrying about a significant part of your business. You can concentrate on growing the business. If the bank reserves the right to raise rates, you are not disadvantaged because if you had a one-year contract, your rate will most probably increase to the market rate upon renewal.

Fight vigorously not to give your personal guarantee. After all, you formed a corporation to shield yourself from personal liability. If the banker asks for you to personally guarantee the line, ask what line he will give you without the guarantee. Ask why the company’s assets aren’t enough. Remind him that he has a 25% cushion with your accounts receivable and a 50% cushion with your inventory. If he persists, consider pledging specific assets that you own outside the corporation rather than a blanket personal guarantee.

One last rule of thumb, don’t fund long-term capital projects from working capital lines.

In my 32-plus years in this business, I have always been amazed at how tenacious a dealer will be in trying to get the best price when purchasing goods for resale, yet turn positively sheepish when dealing with his bank.

Go forward bravely, and good luck.