It is extremely difficult to successfully grow your business in the absence of good banking relationships. Therefore, a good understanding of why you need banking partners, and the rules for dealing with bankers, are essential ingredients to the successful management of a building supply business.
I know I learned more about dealing with bankers during the double-digit inflation period when I first entered the business world than I had ever known in the past. While times are good right now, the pendulum has a tendency to swing, so those of you out there who did not learn your lesson back then should certainly be ready the next time around. This is how the trouble begins—with growth.
Look at your own business this year and assume you’re generating $14 million in sales. Then project a 20% increase in sales in 2020 and you’re looking at a $2,800,000 increase in sales to $16,800,000. With just a few keystrokes on your trusty calculator you’ll pretty quickly realize that unless you make some major changes in the way you’re managing your inventory and accounts receivable, you are going to need additional capital in 2020 to fund the additional assets.
Most owners and managers grew up in this industry when the local banker was a lot like the owner of the local building supply business. They had always been there, and their presence will remain practically forever. But for most of us, those days are over.
The mergers and acquisitions in the banking business have taken their toll on the “old friends” we thought would be around forever. So today it’s wise to have a minimum of two friends when your old friend dies, transfers, retires, or gets fired.
Like in any large business, personnel frequently come and go, so it’s wise to make it your business to become personally acquainted with a money lender who will be around deep into the next recession and beyond. This is part of your job. Although this is changing somewhat, there are not very many bankers out there who possess the outgoing personality necessary to make every customer feel as if he/she is their best friend.
Even when you are not looking for capital to fund your business’ growth, you still need to work at maintaining strong relationships with local bankers. While a personal relationship with area bankers is important, it is the strength of your business that is most interesting to bankers. So, when your CPA prepares your balance sheet and income statement for the most recent quarter, don’t neglect to ask for several additional copies to give you something to take by for the banker to review.
Nothing impresses a banker more than a well-thought-out business plan. A plan for the next three years is preferable, but even a one-year plan will be welcomed. If you have a computerized budget you can show your bankers how you see the coming year playing out.
Your business plan should also indicate how much borrowed capital you will require and in which months. I strongly suggest that you ask your banker(s) for a loan commitment that you may need to call upon during the year. But do not ask for a commitment if you do not at least plan to use a portion of the funds.
To maintain credibility with the banker, keep him/her informed as to what is going on in your business. Bankers don’t like surprises. If you cannot meet your obligation to your banker, tell him/her as far in advance as possible.