How to build and maintain a banking relationship

1. A Workshop Module of the Bonding Education Program
Presented By:
U.S. Department of Transportation Office of Small and Disadvantaged Business Utilization
In partnership with the Surety and Fidelity Association of America
HOW TO BUILD AND MAINTAIN A BANKING
RELATIONSHIP

2. • Show you how to build a successful relationship with
your banker
• Show you how to maintain the relationship
Objectives of this session

3. • Checking
• Borrowing
• Other bank services
• Payroll
• Cash management
Why do you need a banking
relationship?

4. • Your goal
• Leverage your equity to achieve a high return on your investment
• Bank’s goal
• Earn satisfactory return while minimizing risk
• Bridging the gap between your return and the Bank’s safety
• Satisfactory loan proposal showing you can repay the loan
• Your willingness to accept loan structure that assures the bank of your
ability to repay
You need to bridge the gap between your
banker’s goals and your goals

5. • Most common causes
• Long-term sales growth (cyclical)
• Short-term sales growth (seasonal)
• Inventory expansion (job load)
• Receivables slowdown (slow billings collection)
• Capital expenditures (equipment, vehicles, etc.)
• Cash flow timing differences (payables due at first of
month, billings pay at end of month)
• Unexpected events (accidents, weather)
Reasons for Borrowing

6. • Increase in assets
• Carry receivables
• Buy materials for inventory
• Purchase fixed assets
• Decrease in liabilities
• Pay trade debt
• Pay bank debt
• Decrease in equity
• Pay dividend
• Buy out other owner(s)
Accounting Impact of Common Causes

7. • Purpose
• Legal
• Ethical
• Policy-compliant
• Repayment Analysis
• Cash flow
• Collateral
• Guarantees
• Structure
• Pay in full
• Pay on time
• Pay as agreed
Banker’s Loan Decision Process

8. • Amount—anticipated usage
• Purpose—working capital, equipment purchase
• Type of facility—loan, line of credit
• Repayment terms—maturity, amortization, term
• Conditions and covenants
• Collateral
• Guarantee
Loan Request

9. • Company overview
• Line of business—products and services
• Ownership and management
• Experience, training, education
• % ownership
• Board of directors
• Track record
• Time in business
• Successes and failures
• Customers
• Suppliers
• Competition
• Industry condition and trends
Credit Analysis

10. • Financial statement quality
• Unaudited or audited
• If audited, is CPA firm experienced in construction accounting?
• Completeness
• Balance sheet
• Income statement
• Cash flow statement
• Receivables ageing
• Payables ageing
• Contract Status Report
Credit Analysis

11. • Financial analysis
• Internal trends and comparison with industry statistics
• Profitability
• Liquidity
• Leverage
• Solvency
• Cash flow
• Historic
• Projections
• Most likely
• Downside—lower growth rate, higher interest rates, etc.
Credit Analysis

12. • Financial analysis (continued)
• Collateral
• Receivables
• Fixed assets
• Other?
• Guarantees
• Personal financial statements (PFS) must show joint owners of any
personal assets
• Adjusted net worth
• Deduct investment in company
• Deduct any assets hard to liquidate
• Add any liabilities not on PFS
Credit Analysis

13. • Help the banker fill in the loan request
• Translate the reason for your borrowing into a specific
amount and for a specific purpose
• Be able to show you can repay the loan in a specific time
frame
• Be willing to guarantee—make sure your personal financial
statement and personal tax returns are up to date and
available
• Be willing to collateralize
Tips

14. • Help the banker get the information he needs to evaluate
and approve your request
• Aim for annual audited financial statements prepared by an
experienced construction accountant
• Be willing to provide complete financials and keep on giving bank
periodic updated information, at least quarterly—balance sheet,
income statement, contract status report, receivable ageing,
payables ageing
• Be prepared for inquiries about you made to your suppliers,
customers, bonding company, lenders, competitors, accountant,
lawyer
• Check your personal credit bureau report and your company’s
Dun&Bradstreet report to make sure the information is accurate
Tips

15. • Build your professional support team
• Look for a lawyer experienced in construction or real estate
law
• Try to enlist a couple of outside directors—lawyer,
accountant, engineer, architect—to provide you with
outside advice and counsel
Tips

16. • Keep in touch with your banker
• Be willing to let banker visit your premises, examine your
records, tour some of your jobs
• Be willing to communicate regularly—by phone, by e-mail,
person-to-person
Tips

17. • Building a relationship with your banker means helping
the banker evaluate you by
• Giving the bank all the information it needs to show you are a
reasonable risk
• Showing the bank you’re willing to back up your request with
your guarantee and collateral
• Maintaining the relationship with your banker means
• Giving the banker access to you, your company, and your jobs
• Keeping the banker up to date on both the good news and the
bad news
Summary