Clients sometimes look upon the relationship with their banker as an adversarial one and sometimes, look at their banker as a mere vendor. This can be unwise – I suggest that you look upon your banker as a partner, treat him with the utmost respect, respond to his requests for information quickly, completely and transparently and do everything that will protect him and the institution that he represents. By doing this an entity and its principals will receive more political credibility and more latitude than it might otherwise receive.
A former client, that successfully sold themselves to a PE (private equity) backed enterprise at a generous multiple recently was almost non-bankable when I started working as their as needed CFO 6 years before the PE sale. When I started with them, they had just tripped the debt covenants (A condition in a commercial loan that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met. Typically, violation of a covenant may result in a default on the loan being declared, . . .) with their current institution even though, as my client used to say, “. . we never missed a payment . .” The bank learned of this event after the fact. Accordingly, this event caused incredible alarm at the bank and the bank responded (probably at the direction of internal regulators) with some dire tactics. Cash receipts were effectively frozen when received into my client’s bank account and the relationship between client and the bank soured significantly. My client lost all political credibility with the bank and had to find a new lender.
In the search for new institutions we provided candidates detailed, accurate financial information and were straightforward in the likely prospects of the business. We answered all questions and requests put to my client, so that, the bank had a complete and accurate view of my client’s business. And, I think, my presence helped to give confidence to the institution that my client would adhere to more stringent financial management than they had before I appeared on the scene. We were able to build-up a bit of political capital.
We had success in finding a new institution, but due to the financial situation were only able to negotiate an agreement with heavy collateral requirements and which resulted in cash receipts going thru a lockbox that was heavily restricted. Still this was the tonic that my client needed to exit the toxic relationship with their previous banker. The age of my client protecting their banker (as though they were a partner and not merely a vendor, had begun) and I always saw it as my duty that I try to look after institutions that had relationships with my client. This would enable the generation of even more political capital that came in handy later.
But back to the first banker – the one when my client was in distress – by tripping the debt covenants on the bank agreement, my client had violated the loan agreement, basically the contract with the bank. At the bank, a loan that has “. . . gone bad . . .” has to be reported differently and can have regulatory reporting implications to the institution – it can be a hugely unfavorable deal. It might even result in the relationship manager being fired as his management might think that he mishandled the situation, even though a client, “ . . . never missed a payment . . “
I would suggest that this shift in how my clients treated their banker was one of the changes that enabled them to achieve incredible growth (top line growth of 6 times during my time with them) and have an incredible lucrative exit with private equity. More on that in the next case study.
So, remember to “Protect your banker.”