Never Email Financials To Your Banker
I get to do some fascinating work in my coaching and consulting practice. I’ve created a PRA™ framework that’s fully relevant to small businesses (planning, reporting, and analysis) using the tools of Fortune 500 firms.
While I don’t do as much M&A work as I did in my W-2 life, I jump at the chance to quarterback acquisitions from negotiations to LOI approval to pre- and post-due diligence and then post-acquisition integration.
I’ve helped revitalize sales teams with new processes supported and augmented by training and education that are used for new hires.
Finally, I’ve even been asked to be a sounding board in various marketing campaigns. One of my oldest clients even has a slogan on their website that I recommended. In short, I love marketing (mainly the logic and craft of marketing … I stink at the part of marketing involving creativity).
However, my favorite work is banking. Specifically, I enjoy the process of finding, getting, and keeping financing relationships with lenders. That includes revolving lines of credit and term loans of all types.
My close rate on every bank project I’ve worked on is 100%. That includes securing more than $3 million for a manufacturing facility that has never cash flowed in the midst of the COVID shutdown. Not only did I close on that loan, but two other banks also gave us term sheets.
I don’t share the above to brag. I’m compelled to provide some credibility that I know bank financing like the bank of my hand. Similar to marketing, there’s an art, science, and craft of closing on debt financing.
In this brief essay, I will share with you what every busy CEO does when the banker asks for financial statements. She always complies without thinking about what she’s doing. I not only discourage this practice, but it also goes against everything I believe in with respect to maintaining a healthy relationship with the lender, as odd as that might seem.
You and I should never email financials to the lender until a few conditions have been met. Before I explain why let me share my financing philosophies:
- I meet with bankers monthly after establishing a new relationship after we’ve closed on a loan. We review the financials, and I explain everything, including warts that keep popping up. This is non-negotiable for about the first 15 months of the relationship. Then we cut back to quarterly.
- Share bad news immediately.
- Always be transparent.
- Never pay loan fees.
- Always get three approvals before closing on a loan (that’s the cure for loan fees and excessive rates).
- Work hard to downgrade audits to full-disclosure compilations with periodic agreed-upon procedures focusing on fraud and liquidity impairment.
- Shoot for the Rule of 2OpCF. I want my operating cash flow to be at least 2x of debt service.
- For lines of credit, I want a healthy financial cushion. I prefer my LOC only to be one-half of discounted working capital collateral.
- Annually, I want my banking team to be on-site for a dog and pony show. Everyone on the management team attends to provide a short after-action review of the areas they steward. Remember my point about transparency above? Each manager also goes over their friction points and how we overcome them.
Let me guess; you don’t have a documented list of your banking philosophies. Please do so because writing down your beliefs will help you to slow down in the future.
I’m not doing as much part-time CFO work as I used to, as it’s an around-the-clock endeavor. When I start those roles, nearly 100% of the time, we change lenders because of a poor CEO financing philosophy. That’s because their philosophy can be summed up in a few words, “Act on the first lender who is willing to give you money.”
No More Emailing Financial Statements
Now that you understand the concept of a financing philosophy, I probably don’t need to explain why I don’t email financials at a lender’s request.
Since I meet with my lenders monthly, the question never arises. When I wrap up my meeting, I email the financials to the lender (and never in advance).
Control the narrative. Control the conversation. But do so truthfully and with full transparency. That’s why we never email financials to the lender before we’ve explained them.
It’s not about hiding something or keeping them in the dark. That goes against two of my philosophies. Our goal is to continually educate, educate, educate, and educate them about our business. They may think they are financial experts, but every business is different, even within the same industry.
I don’t want my lenders conversing within their own minds without my narrative in advance. Plus, there are no less than two side benefits to my philosophy.
When I meet monthly with my banker, they are slowly becoming a trusted advisor on my client’s team. Provided they are not just some spreadsheet jock, these lenders ultimately become our advocates within their lending organization. And that leads to the next side benefit of monthly meetings with the lender.
As a part-time CFO, the number one fear occupying my mind is the lack of capital adequacy. It was through working with a few weak lending relationships that I stumbled upon the idea of the monthly bank meeting. The end result? A stronger relationship and quick turnaround on the annual LOC renewal process.
If you are sweating it out because you can’t get that $3 million bump on your LOC or you’re worried that the bank will not renew your LOC, it’s because you only talk to them when you have to. That’s backward thinking. Please consider my process above; it works.
Points of Friction
I like that term, so let’s stick with it. Why do CEOs email financials and not have a well-documented financing philosophy?
That’s easy to answer. They are busy and in a hurry. Let’s add to the list:
- The banker asked for the financials, and the CEO has always believed you do what the lender asks for.
- The thrill of the kill. Let me explain. In rare cases, I don’t own the banking relationship when I’m their part-time CEO. In most of these cases, they love the thrill of winning and getting something they want without considering the consequences of acting too fast.
- Laziness. I’m even referring to young in-house CFOs who don’t want to work the monthly meetings with bankers. They want value, not the relationship. I want the relationship and value (the financing I’m receiving). I want both.
I’ve been asked if I ever break my own rule. Yes, but typically around the second year of the banking relationship. The education process is generally complete. However, if a blip comes up on our radar, we meet immediately, go over our financial situation, then I email the financials.
A Final Call to Action
We started with a simple premise–never email financials to the bank. Instead, we came away with ideas that far transcend this seemingly trite advice.
The bigger issue is, “Do you have a ‘why’ for everything you do in your lending relationships?”