Although it would be nice for some reassurance that this pandemic is ending soon and won’t repeat itself, and the chances for further economic uncertainties are slim, there are no guarantees. If anything, this pandemic has taught businesses that being prepared—for anything—is critical. One way to establish some feeling of security through economic ups and downs is to have a strong working relationship with your bank. Here, Dennis Wright, president of UMB Bank Dallas, addresses some key things to consider when evaluating your company’s relationship with its bank so you can get the greatest benefit from its services when you need them most.
Engage in proactive communication.
“The best advice I can give executives and CEOs is to be proactive in their communication by reaching out to your banker and providing updates, as you would with other key stakeholders, so your bank has current and complete information. Proactive transparency will foster confidence and trust. If you have a management memo or report that you send out to your board, send it to your banker as well. Keep them looped in. Explain why certain performance metrics are important. What are your drivers, good or bad? Bankers need current information about their clients, even if it’s not good news. It’s always better when the leadership team is being transparent with their bank.”
“In instances of declining sales, be prepared to demonstrate a well-thought-out plan that you think may help correct underlying problems. Show that you are on top of things and have taken the time as a management or executive team to come up with a solution, be it expense reductions, actively collecting accounts receivable, or pivoting and shifting to different customers or product line-ups as times are changing. Demonstrate how the company’s products keep the company competitive. This is key in times like this, especially if you are in a distressed industry.”
Know your company’s liquidity.
“One thing that constantly comes up in our conversations in and around the bank and in client conversations and meetings with key executives is liquidity. If your business is under stress, really understanding how much liquidity you have to weather the storm is important. Talk with your banker about cash flow. How many weeks or months do you have, particularly in the worse-case situation? You want to be able to forecast out for several weeks or months and know where your cash flow will be over time. If you can do that confidently and with good information behind it and track through that—here’s where we are and where we can be—that really helps the bank. It provides the bank with the confidence it needs to support your company through a tough time.”
Understand your credit access.
“Know your company’s ability to access lines of credit. One thing a company may take for granted is thinking that because it has a line of credit, liquidity is not a problem. Maturity dates are important. Know the mechanics of how all those things work–how the line of credit actually functions – not just that you have it. When your performance changes, sometimes that will impact your ability to access that line of credit.”
Communicate with your bank.
“There really is no such thing as too much communication with your bank. Some of the best clients I have, I talk to on a regular basis. They implement best practices and write up a management memo every quarter and that says what happened during this quarter, where they are year to date, what happened in the market, what they see for the rest of the year or next quarter, and so on. This helps your banker feel like they are a bigger part of the conversation. If you are already doing that when you go through a tough cycle, that means you have already built trust and a good relationship with the bank, as well as an incredible knowledge base for your banker. If your banker doesn’t know your business well, it can be more difficult for them to provide you with the solutions you need. If I know more about your business and I am up to date, I will be able to say, ‘Here’s what they are doing to tweak something and correct the problem.’ It gives me information and updated projections while you get back on track.”
Have an action plan.
“As I look back on how many companies reacted during the great recession that began in 2008, the initial reaction for many was to hope. They kept on hoping that they wouldn’t need to cut expenses and headcount and do those really tough things to stay in business. This time, the companies I work with knew to be more realistic, knowing this could go on for a while. They were quick to have an action plan, and it’s a really tough balance that goes on in any executive’s mind. They had to ask themselves, at what point do I talk to my bank about this? I appreciate it when they give it enough time where they come to some level of assessment before talking to us. It’s a little bit of an art, knowing when to communicate with the bank, so it’s not too late and not too early.”
Try to maintain discipline in the good times.
“In good times, projections just keep going up and up, and it’s tempting to take on more debt. But when you get something that impacts revenues by 20 to 30 percent, that leverage goes up. Try to maintain discipline by not taking on too much leverage in the good times. It’s important to exercise the muscle of stress testing your financials. How much loss can you withstand and still achieve goals and meet obligations? By strengthening that muscle in the good times, you will be prepared when more uncertain times arrive.”
Know your bank’s pandemic plan.
“I think everyone right now understands the importance of having some plans in place for different environments. At UMB, we have always had a pandemic plan in place. We look at it annually and review it, and that’s our plan for the upcoming year. When COVID-19 hit, we very quickly pulled it off the shelf and started working on it early in the year, so this hasn’t been foreign to us. This is important for all types of companies. How do we operate when we can’t go to our office? That actually caught people a little off guard. Do we have the right people set up with the right access, technology, and other things they need to make sure this business keeps running? It is nice that we have been able to be a resource for others in sharing how we approached it and put our plan in place.”
Have confidence in and understanding of your bank.
“You want to work with a bank that has liquidity and strength. When I first began my career with UMB, I learned it has always kept its loan-to-deposit ratio at a reasonable level to be able to honor any commitment on any given day. UMB maintains a balance sheet with enormous liquidity. That’s something that is unique in this day and age when many companies try to operate on the edge to maximize profits. We really want to get to know our clients and instill confidence in them that we are going to be here when these challenging economic times come again. You should have confidence that your bank is running its balance sheet in a way that helps protect your business. The U.S. banking system, by and large, has always met its obligations. A bank is a key vendor to most companies, so you need to analyze your bank as a key vendor the same way you would other key vendors. The loan-to-deposit ratio is widely published. If it’s really high and approaching 100 percent, that tells you the bank doesn’t have a lot of liquidity and is less likely to allocate dollars to you if needed in a down scenario. Your bank may also react differently in a down situation as opposed to a bank that is liquid.
Ask if your bank has large balance sheet concentrations, particularly in your industry. When a bank has a large concentration in one industry, it may reach a point where it may not have the ability to do anything more in that industry. You can be exposed if your industry goes through a difficult period.”
Have a relationship with your bank; not just one banker.
“Really know who your bank is and let them know who you are. Don’t outsource your company’s banking relationship to your CFO. Get to know your banker or whoever your capital providers are. This is an investment you will make that will pay dividends in difficult times.”