Those Who Have the Gold

Thoughts and Observations On Borrowing from Banks: How the “Five Cs of Credit” can help shops improve their relationship with bankers by increasing their “bankability.”

Back in 1981, with the prime borrowing rate at an all-time high level of 21 percent, most bank customers felt that those cameras they have in banks to photograph robbers should, in all fairness, be pointed at the “real” crooks: the lending officers. At such rates most companies found it difficult, if not impossible, to borrow money. Actually, it wasn’t so hard to borrow money, it’s just that no one could repay it.

Those days of exorbitant interest rates are gone now, at least for the time being. In fact, interest rates are at all-time lows. However, the problems of finding capital and repaying loans remain. Many business owners have feelings of animosity and bitterness toward banks and bankers as a result of their bad experiences. For just a moment, let’s redefine the Golden Rule: those who have the gold, make the rules.

Let’s also take a look at the recent past. The economic firestorm of the last several years has changed the credit landscape going forward. First, let’s look at the primary components of the recent financial meltdown: 1) a lax regulatory environment that created the conditions for abuse, 2) sub-standard credit policies and documentation, 3) economic over-optimism, and 4) borrowers’ lack of financial acumen.

In the bank regulatory arena, lax enforcement has been replaced by an overly restrictive review process that is being applied in an arbitrary manner that is actually hindering the recovery. Banks are scrambling to refocus on credit training and loan documentation.

Finally, there’s the issue of business owners’ and operations managers’ lack of financial acumen. For decades, everyone has known, and accepted, the classic profile: “Most business owners know how to ‘make it’ and ‘sell it’ . . . while the financial side of the business remains somewhat of a ‘mystery’.” This “folklore profile” will no longer cut it in today’s over-zealous documentation environment. Business owners will be expected to “up their game” with regard to financial acumen and business performance, and this entails moving from “Profit Mystery to “Profit Mastery.”

Keep in mind that borrowing and lending represent two sides of the same coin. No business relationship — or any relationship, for that matter — works out unless you have a win-win situation. This includes banking. In fact, most bad experiences and loan rejections are the result of poor communication and lack of education: the banker’s lack of education about your business and your lack of education about the bank’s procedures, policies, and constraints.

This mutual lack of education breeds misunderstanding, mistrust, and frustration. Ted Frost, in his book Where Have All the Woolly Mammoths Gone? puts it this way: “I’ve often thought if I could collect all the nation’s bankers in a big gunny sack out in the middle of the ocean, that I would jump overboard with the sack and sacrifice myself just to rid the world of them.”

It doesn’t need to be that way. Let us share some thoughts, from the perspective of someone who’s been both a banker and a business owner. Since it usually aids in understanding to view any situation through the other person’s eyes, let’s examine where your banker is coming from.

The best way for banks (and bankers) to be successful is to loan money to businesses that pay them back. But 80 percent of all businesses fail. So bankers tend to be very cautious because they have a four out of five chance of guessing wrong. And that 80 percent statistic was in good times.