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.
The client that I referenced in part 1 of my banker case study was able to get out of their toxic relationship with the banker that they used when I joined them.
They were able to obtain a facility for $2.0 MM that was collateralized by client accounts receivable, but only for 80% of the balance, and only for the most creditworthy clients. The facility was guaranteed by the shareholders and was fully collaterized. Not a great facility, but it was a start.
Over the next 6 years the client would grow the top line by a factor of 6 times and we would change from an asset based lender to a traditional bank and renegotiate the facility several times, reducing the stringent collateral provisions, reducing the interest rate and negotiating debt covenants that were reasonable and that were based on our forecasted financial performance.
In the 5th year of my relationship, the total availability on the line was adequate at $8.0 MM. Then my client received a huge assignment from one of their clients – a level of project that was unfathomable a few years earlier. The level of activity was even difficult to forecast as it was an open-ended purchase order. We monitored activity closely and it appeared that the $8.0 MM availability would be insufficient and, worse yet, we were going to trip the debt covenant in 2 months time. Remember from part one that this is basically breaking the contract with the bank and is the mortal sin of not protecting your banker. But remember we were in forecast mode and we were generating profitable/positive cash flow activity from a client that had the highest level of credit rating.
So, we contacted our banker, briefed him on our situation, provided him with our detailed forecasted data and made our request – we needed an emergency line of credit increase to $10.0 MM and we wanted the bank to agree to relax our debt covenants.
Luckily, as we have built up incredible amounts of political capital with our relationship manager and the institution, and the fact that we were proactive (letting the bank know in advance rather than after the fact) our request was approved. That year the client generated record revenues (a level that was 6 times higher than in the year I started with them) and record profits. That year’s results were the results that a later trade sale was based on that resulted in huge proceeds for my client. It couldn’t have materialized any better.
I would suggest that much of the success my client realized is their outstanding relations that they had with their bankers over the years – they provided much of the working capital that made the results possible. The results that led to a successful exit to a Private Equity backed entity.
So, remember to “Protect your banker”.