Bank on candor

Tedd Wein struggled to keep his Mailboxes Etc. store afloat and his cash flow positive during the first few years he was in business.

One of the things that helped him survive was a willingness to go back to his banker, not once but twice, to get a year’s extension on the agreement to make interest payments only on his loan.

That wasn’t the only thing that kept his fledgling business going, but Wein’s willingness to be up front with his banker and stave off problems before they became unmanageable was pivotal to keeping him in business.

If you’re having a tough time financially, keeping your banker out of the loop is probably the worst thing you can do. Still, some business executives aren’t sure how to approach their banker with less than optimistic news about their company’s near-term prospects.

“Some management teams aren’t sure how the bank’s going to react to this situation,” says Tim Hammer, a shareholder with accounting firm Schneider Downs & Co.

Nonetheless, Hammer advises business owners not to hesitate in sharing their difficulties with their banker.

“Lenders would rather hear about problems sooner than later,” says Hammer.

Often, Hammer says, businesses take a wait-and-see approach, hoping the economy will turn around. They fear if they share bad news, the lender will cut off credit or increase personal guarantee levels. And, in fact, depending on the situation, your banker may insist on changing some of the specifications of your financing arrangements, such as requiring more frequent financial reporting or increasing interest rates. But those aren’t good enough reasons to keep the bank in the dark.

Hammer suggests businesses put together a turnaround team of managers or, more practical for smaller companies, a combination of managers and outside advisers, including accountants, lawyers and perhaps an outside consultant to craft a plan for recovery. A well-thought-out plan, he says, will gain you credibility with your banker.

Ongoing, Hammer suggests, businesses should be evaluating their financial reporting system to ensure it allows for informed decision-making. It’s also a good idea to review your company’s needs and evaluate whether your current banker fits your requirements.

Says Hammer: “Sometimes you outgrow the bank you’re with.” How to reach: Schneider Downs & Co.,