It’s unrealistic to expect your banker to provide counsel about how you can succeed through slower payment schedules or loan forgiveness.
Having personal support when you’re building your business is important. Positive relationships boost your confidence and your creativity. Strong connections provide a healthy foundation for your long-term success.
You may have an honest, trusting relationship with your banker. But remember, the banker sitting behind the desk is acting as the ‘face’ of the bank. And the bank’s interests and your interests can diverge.
The Role of Banks
A bank’s purpose is to lend and borrow money. Here’s the breakdown for how it works:
- The bank borrows money from you in the form of deposits and pays you
interest for letting them use it.
- Then, the bank lends deposits to other customers and charges them a fee
(interest) for the loan.
The interest charged for lending is more than the interest paid on deposits because the bank is a business. And just like your company, the bank needs to make a profit to survive.
Since banks control large amounts of cash, they have a significant effect on the financial stability of individuals, businesses and countries. As a result, banks are highly regulated by the government with guidelines designed to protect customers.
Lending Tactics Protect the Bank
Even with laws in place to promote fair access to loans, borrowing money is a challenge. Bankers have the keys to the cash vault. Business owners recognize the power bankers hold and will defer to their authority to get access to cash.
After the banker makes a loan, his role becomes focused on serving the bank:
“The banker has a job to do and that’s to collect – he’ll do anything to collect – it’s his job.”
- Aaron Todrin, President, Second Wind Consultants
Tactics bankers use to get loans paid may not be in your best interests. Here are some tactics to look out for:
- Encouraging you to draw funds from protected accounts such as IRAs
While you may be able to make a payment or two with this decision, you’ll
have to pay taxes and penalties for early withdrawal from these funds.
- Suggesting your spouse co-sign a business loan.
This signature provides the bank with access to any asset you co-own with
your spouse, including your home. When faced with the choice of losing
equity in your home or liquidating business assets to repay a loan, tapping
the business becomes an easy, if destructive ‘yes.’
- Emotional appeals to your honor and ethics as a business owner.
Bankers will pressure you to ‘do what you have to do’ to find the capital to
pay. “keeping your word” can be intensely persuasive.
- The bank’s perspective is self-centered.
When your business is running well, the bank happily accepts repayment and
the profit of your loan. But when revenues are down, or the unexpected
happens and you can’t make payments, the bank is not your friend. The
institution will seek full repayment including interest and expenses, even if this
means you lose deposits, investments or your business.
Your Rights as a Business Owner
You own your assets and your business. The bank has a security interest in your company, using your assets as collateral for a loan. But banks are limited by law from taking business assets. Lengthy legal processes must be followed including foreclosure and auction to get access to assets and sell them for cash.
You have time and many options to recover from a default position and continue your business mission such as:
- Getting a cash infusion from a business partner
- Leasing or selling assets to improve cash flow
- Exploring debt workout solutions
Working with a bank (and your banker) should be a positive experience. Honesty and openness are strong business principles. Letting your banker know when cash flow is slow, and you can’t make a payment and having a straightforward conversation about options is the right course to follow.
But it’s unrealistic to expect your banker to provide counsel about how you can succeed through slower payment schedules or loan forgiveness. The banker works for the bank and will focus on collection.
You can find a solution that works for you and the bank. Borrowing money shouldn’t make you vulnerable to total loss.
“(Banks) are entitled to your numbers and your story, but not to your lifeblood.”
Our team is here to help you navigate your way out of debt and emerge with a strong business pointed toward success. Contact us to schedule a consultation.