Many retailers would say bankers in retail 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 a retailer's 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.
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.
A retailer doesn’t tell a banker in retail he “needs a loan;” he say he's “considering his financing options.” He doesn't say another bank turned his loan down; he say he's “talking to other banks, too.” And he doesn’t say he needs a new banking relationship; he says he already has a bank “but it never hurts to talk.”
Assessing the worthiness of a loan is as subjective as choosing a mate—what one finds attractive is sometimes inexplicable to others. But when everyone else seems enthralled, popular judgment reassures us and we’d consider ourselves fortunate to be chosen from among so many.
Repayment risks aren’t easily determined and bankers in retail have considerable latitude in filling their loan portfolios. While almost all subscribe to various sets of formulas, most don’t allow them to deter loans they want to make. Sometimes the ultimate validation of a loan is the fact that other bankers are pursuing it, too.
For all but the smallest of loans, convincing a banker we’re creditworthy is only the first step. The banker must then convince the loan committee.
Bankers who call on retail stores are usually young “business development officers”—they beat the bushes for potential customers, collect loan applications, and bring them back for consideration by the decision makers, the loan committee.
Loan committees are training grounds; they pick apart their apprentices’ applications, point out deficiencies, and dwell on every potential pitfall and liability. If our banker can’t defend our application adequately, the committee provides further lessons in the form of loan requirements and restrictions, if not outright rejection.
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.
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 in retail wonders what the previous banker knew.
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.