Bankers and Borrowing Retail Truths

The book "Retail Truths" by Chip Averwater

Truth #348: Bankers aren’t venture capitalists.

Many businesspeople would say bankers have thoroughly earned their conservative reputations—they make loans only when repayment is guaranteed in every way they can conjure. Even when secured assets are more than sufficient to assure loan recovery, they like to have our homes, cars, investments, and future earnings on the line, too.

Bankers are quick to point out that their rates are cheaper than other sources because they reflect this minimized risk. Fair enough—the interest we pay a bank doesn’t include much premium to cover loan losses.

When our funding needs can’t be guaranteed with assets or other worth, bankers probably aren’t the right source. Partners, stockholders, or venture capitalists are more likely bets.

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Truth #349: Bankers want you most when you need them least.

According to Mark Twain, “A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.”

We have to make a convincing case that the sun is shining, we can easily pay back, with interest, what we propose to borrow, and that we have financing alternatives. Confidence and an air of independence (along with a realistic plan) go a long way.

We don’t tell a banker we “need a loan;” we say we’re “considering our financing options.” We don’t say another bank turned our loan down; we say we’re “talking to other banks, too.” And we don’t say we need a new banking relationship; we say we already have a bank “but it never hurts to talk.”

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Truth #352: Educate your banker so the loan committee won’t have to.

We can help our banker and our loan by preparing him well, coaching him with answers to the questions he’s likely to be asked. If they’re complex, we can provide them in writing, review them with him, and make him prove he understands them.

We should encourage him to call us back with questions and offer to review his write-up with him before he submits it (although he’s unlikely to agree).

If we don’t have confidence in a banker’s ability to present our case, we can ask him to introduce us to his boss. When the boss understands and endorses the application, school takes recess.

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Truth #354: A banking crisis is always just a personnel change away.

A banker’s staid and conservative demeanor often belies some surprisingly arbitrary decisions. Despite ratios and rules, a banker finds ways to rationalize almost any loan that strikes his fancy—or walks away from the most conservative of loans because “it just doesn’t feel right.”

A new banker means new and different preferences, biases, and decisions. In the most radical cases, he can, seemingly on a whim, abandon entire fields of established lending like auto financing, home mortgages, and retail floor-planning.

It’s not uncommon for a new banker to decide he’s uncomfortable with a store’s finances or plans, or to simply not understand the business model. Suddenly a historical relationship is literally that.

And finding a new bank is far more challenging when it’s not by choice. Every potential banker wonders what the previous banker knew.

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Truth #356: Bankers comprehend ratios, not businesses.

Few bankers understand financial statements from the perspective of operating a business. They don’t know how much inventory is appropriate, why receivables are necessary, what margins are needed, what proportion payroll should be to sales, how much advertising is appropriate, what vendor terms are available, etc.

Instead they focus on the application of ratios—debt-to-worth, interest coverage, current ratio, inventory and receivables turnover…. Our financial statements are simply input for their ratios.

An energetic banker will occasionally get out Robert Morris or other analysis reports to compare our numbers to other (sometimes dissimilar) businesses. Such comparisons can be interesting but they tell little of how our businesses actually operate.