Relationship Banking

Relationship Banking

Ten ways to tap into your bankers' expertise, gain their trust, and prevent unpleasant surprises.

We asked several local bankers what their small and midsized business clients should know about forming a better working relationship with them. How can businesses get the most out of their commercial banking relationships? The most common answer—“Communicate!”—won’t surprise anyone (although it’s true, always and forever). But their more specific recommendations are worth a few moments’ contemplation.


Pick the right banker in the first place.

Large banks often have a series of lending departments that are geared toward different-sized businesses. For instance, U.S. Bank in Minneapolis has a corporate banking group for companies with revenue greater than $500 million, but it also has a group dedicated to companies in the $10 million to $500 million range, plus a group that focuses on small businesses.

Smaller banks may zero in on small-business clients, partly out of preference and partly because their lending limits may constrain their ability to serve larger clients. But these organizations may be better versed in working with the U.S. Small Business Administration or community programs to secure financing for their small clients. What you may not know is that banks sometimes specialize in certain industries, too. Corporate lending groups may have subject-matter experts on staff to serve their Fortune 500 clients—say, in telecommunications—but even lenders that deal with smaller businesses sometimes specialize.

“If a bank feels that it has a particular expertise—let’s say [in] printing—and it thinks it knows how the printing business works, it may say ‘Let’s get some more printers,’” says Mark Ethen, chief credit officer at Minneapolis-based Northeast Bank. “The balance to that is always concentration of risk. You don’t want half of your portfolio to be in printers, either.”


Have your personal finances in order.

When bankers are deciding whether to lend money to a small-business owner, personal finances matter. “It’s been proven that people will handle their business obligations as they handle their personal affairs,” says Chuck Mueller, president and CEO of Fidelity Bank in Edina. “So their credit rating, and how they handle their financials, is very, very important. We look at the credit score, how they’ve handled their debts, how they’ve handled their other obligations. [If] they can explain it—for example, if they had a medical issue—we’ll listen to that and work with that as well.”

“When we look at any situation, we’re looking at the entire relationship,” says Rich Tofte, a business banking manager at Wells Fargo. “If personal financial habits are strong, it usually translates into having the financial resources to be able to open a business or move a business or add to a business.” If all goes well, he says, the client won’t have to start dumping personal wealth into the business. But having the ability and willingness to support the business in a pinch is a positive attribute.


Tell your banker where you are in your life.

Business bankers need some personal information in order to do their job effectively. “What’s relevant is what your goals are,” says U.S. Bank’s Twin Cites market president Elliot Jaffee. “Say you’re 60 years old and you own a family business. If you’re looking out into the future and thinking about ‘When am I going to retire? Will my children be my successors? What are the liquidity needs of my family?’, all of that ties together. When we look at a financing structure for a company, we need to make sure that it gives the kind of flexibility that allows the business to thrive and meets their personal financial goals. And those are going to be different for different people.” Bankers need to know what you’re trying to accomplish so that they can align the bank’s capabilities with your objectives. “So when we talk, here are some questions,” Jaffee suggests. “Should you try to take capital out of the company to create liquidity for your family? Do you have charitable objectives, philanthropic objectives, that you want to meet? What are the growth plans of the business?”


Frame your business plan appropriately.

When you approach a banker for financing or a line of credit, remember that your bank is a lender, not an investor. “We’re not like equity investors, where we buy into stocks that need to go up,” Jaffee points out. “We’re there understanding that there are going to be a range of outcomes over time. And it’s just preferable to have the business owner’s point of view as to what is going to influence that range of outcomes. We want you to be really forthcoming about your range of expectations for the business. Businesses do go through cycles, and we get that.”

“I think that’s sometimes a misconception in startups,” Ethen agrees. “An investment bank [may feel that] your great idea is your part of the equation. A commercial bank looks at it a little differently and says, ‘We like your idea, but you have to have a vested interest.’ There’s got to be some financial resources in the game from the small business owner.”

This key difference should affect the way the business owner presents information to a banker, Mueller says. The cool idea is less important than the bottom line. “Don’t sell it to the bank as though the bank is investing,” he advises. “Have it laid out numerically. The accounting world is what takes what you are saying—your project, your plan, and your business—and translates it into a common language.”


Form a strong bond when times are good.

Get to know your banker right from the start. Invite them out to see your business in action. Give them monthly reports and explain what’s behind the numbers. A banker who sees your accounts payable aging every month will be more willing to lend you a little money to pay a crucial supplier. Likewise, a banker who has seen your projections may be willing to supply a little more working capital when a projected sales peak doesn’t materialize.

“You have a much higher probability of getting the money to carry you through that period, versus if you haven’t talked to them about it before,” Mueller says.

“If we’ve worked with people for a period of time and we understand the nuances of their business, part of our responsibility is trying to figure out a way to work with them through problems or concerns,” Ethen says. “If a company starts out the year and loses a half-million dollars—or whatever is a significant number to them—there’s really not a banker out there, outside of their current banking relationship, who is going to understand what is going on with that customer enough that they’d be willing to jump into the mix. That’s why the relationship is so valuable.”


When things go badly, talk more, not less.

People who want to win are never afraid of the score, Tofte says. That means successful businesspeople never avoid their bankers when times are tough.

When you start seeing signs that you won’t meet your projections, the worst thing you can do is hide, Mueller stresses. “We want to get in there early to work with you and give you the benefit of our business experience. We can give ideas, advice, directions, probabilities, so you can make a decision. It doesn’t mean you’re a failure.”

What bankers need from you at a time like this is for you to show up with concrete ideas for repairing the situation. “Saying ‘The economy is down’ doesn’t fix the problem,” Ethen says. “We want to hear about solutions that are within your control: This is what happened, and this is how we’re going to get there.”

Still too fearful to talk to your banker? Here’s one more reason to pick up the phone. Ethen reveals that clients who suddenly pull a disappearing act are actually raising a red flag, whether they know it or not.

“I think that’s often the first sign that there’s a concern,” he says. “If a customer starts not talking to us, we view that as a potential sign that things aren’t going that well. It is an indicator for us.”


Work with your banker on proactive decisions.

Tofte says his experience has shown that when the economy tightens, proactive businesses fare best. That’s why you should brainstorm with your banker about solutions that may keep you ahead of the game.

“I can tell you that the people who found themselves in the best position when things recovered were the ones who were very aware of what was going on in the economy and how it impacted their business,” he says. “They made sure that they started looking at what this new reality was going to do to their cash flow or to their balance sheet or to their business, versus waiting around and hoping for something to change. They made some harsh decisions internally, but they knew that those decisions would make them able to come out the other end.”

Bankers can help you find the silver lining, too. “We like to talk with our clients about the what-ifs,” says Kate Kelly, president and CEO of Minnesota Bank & Trust in Edina. “If you’re really well positioned and if you react quickly, versus putting your head in the sand, you might come out of [a tough financial time] as an acquirer. Or maybe it’s a time to start a new arm of the company. You can really get lean, and then what do you do when you get lean? You can kind of be on the opportunistic end of it.”
Let your banker help you find emergency capital.


Entrepreneurs and business owners are, by nature, self-sufficient and optimistic. They may prefer to manage problems on their own when they can, seeking outside assistance only when absolutely necessary.

If you recognize yourself in this description, take note: If your business needs a monetary infusion, don’t be tempted to pour personal funds into it without talking to your banker first. “So often we’ve seen people who start chewing into their savings,” Mueller says. “Then they want to start taking their IRA money. Please, please, please, come and talk to us and discuss this. Do you really want to do this? Is this the right time? Is there another source of capital? Do you want us to work with you for another month or two before you do it?”

If you really want to take additional personal risks, he says, talk with your banker about what it will mean and how you should go about it.

“It’s when you sign these guarantees and you don’t lay that groundwork with your banker beforehand that the fear starts to build,” Mueller says.


Share what you know about your market.

You know your market well—far better than a banker could hope to. You know which economic indicators presage feast or famine. Pass that information along to your banker.

“What are the leading indicators?” Jaffee asks. “How do you know when your revenues in the future are likely to be up or down? If you’re in the furniture business, for example, housing starts and housing sales are a very, very significant leading indicator. We’ve got clients at the bank here that sell furniture and they’re really good at it, but in 2009, we knew it was going to be a tough couple of years.”

If you and your banker both know in advance that you’re in for a tough period, you can prepare your balance sheet so that you have plenty of liquidity through a range of outcomes. You can focus on managing your working capital. “Loan arrangements from banks typically have some structure around them that just has to be managed through, to the extent that operations weaken,” Jaffee explains. “So we like to know in advance, if we can.”


Have a plan A, B, C, and D.

Contingency planning is the key to success, Tofte says. “I’ve never dealt with anybody who didn’t want to succeed,” he says. “So it’s usually something that was unforeseen that’s caused a problem. In every scenario that I’ve ever seen where something bad has happened, it’s been because there weren’t any contingencies in place.” Most companies have a plan A and a plan B, Kelly says. But often, when the business climate is less than ideal, companies are already using their plan B. What if something else happens?

“Really think it through and communicate with your bank,” she says. “Tell them, ‘We all know it’s a tough economy, so I’m not going to be wildly optimistic right at the moment. Plan B is probably the best I’m going to see. So because of that, I’m going to create C and D. Here’s what I can do. I am either a heavy fixed-cost business, or I’m a variable, or whatever. I can turn this spigot on, or that.’”

Even if plan C becomes the reality, your banker will know that you’ve planned for it. And hey—at least you haven’t had to resort to plan D! “The banker knows you have a plan,” Kelly says. “I think it’s a good conversation to have.”