Monday, September 21st, 2015
By Gideon Grunfeld
When did you last talk to your banker? Do you even know them by name or are they one of countless vice presidents who work for Bank of America, Wells Fargo, or other enormous financial institution?
Your banker needs to understand your business well enough so that they can move quickly to help you if the need arises. And like any important relationship, it needs to be cultivated. If you haven’t spoken to your banker in years, don’t expect them to rush to loan your firm money or extend or increase a line of credit just because you feel panicked over cash flow. If you want to grow your firm strategically and cushion it from disaster in tough times, you need to have a solid banking relationship.
Five Steps to Make a Banker an Ally
1. Establish a relationship with a business bank that understands law firms.
A business bank is one that makes most of its money from collecting interest payments on bank loans and lines of credit. Avoid retail banks that make most of their money from checking account fees and lending money to consumers. Over the past five years more banks have established departments that specifically service law firms. Find out what kind of experience your bank has working with law firms.
2. Cultivate an ongoing relationship with at least two key people at your bank.
It seems that every other person at a bank is a vice president, so it can be a bit tricky to find out just how much authority your contact actually has. Make sure that your primary contact has enough juice within the bank to approve a loan or line of credit that is sufficiently large to make a material difference to your firm. To find out how much authority they have within the bank, ask who at the bank has the authority to approve lines of credits and loans, and what role does the person you are talking to have in that process. Likewise, bank employees move and transfer jobs, so it is best to know more than one influential person at the bank.
3. Find out what your bank specifically needs to provide certain services.
For example, different banks require different amounts of documentation to approve a line of credit. All require business tax returns for 2-3 years and most also want to see personal tax returns from at least some partners. Moreover, banks have different guidelines when determining whether to lend a law firm money. Find out what your specific bank requires and what financial indicators they use BEFORE you need the money. This is a conversation you should have months and perhaps years before you intend to borrow the money.
4. Make your banker aware of your business plans.
I recently worked with a firm that wanted to elevate someone new to the ranks of equity partner. Given the size of her ownership share in the firm, she needed to borrow more than $750,000 to buy into the partnership. But the firm’s bank didn’t provide loans to support partnership buy-ins because the bank considered such loans to be personal loans. Moreover, when I called other local banks, almost all said that they wouldn’t make such a loan unless it was part of having the firm’s overall banking relationship. In other words, if the law firm changed banks, as part of such a move the bank would be willing to include individualized loans to folks who became partners and needed to fund their partnership buy-in. This is a conversation the firm should have had with the bank well before it decided to offer the equity partnership.
5. Be aware of the covenants you have made to the bank.
Financial institutions impose different reporting and financial performance requirements on borrowers. Some may require a law firm to remain profitable in order to maintain the loan or line of credit. Some business banks require a line of credit to be paid back in full with interest every 12 months before opening up a new line of credit. Likewise, understand the risks that individual partners face should the law firm default on the loan or line of credit. In the event of default, the bank may make all partners jointly and severally liable. These are the kinds of terms that can sometimes be negotiated when you establish a new banking relationship or when you seek to obtain financing. But once you sign on the line that is dotted, your contacts at the bank are unlikely to be able to change these requirements. So at a minimum, review your documentation and make sure you understand what you have promised the bank in terms of financial disclosures and profitability in order to maintain your loan or line of credit.
A good banking relationship is instrumental to the growth of a law firm. And in difficult times your banker can be the difference between the firm surviving or closing its doors. Too often, however, law firm leaders treat the banking relationship as an afterthought. Don’t make that mistake.