Chapter 14 -
Improving banking relationships

Bankers and other lenders can be your best friend or your worst enemy. Know what they monitor and watch it before they ask questions. Also, understand a few key banking terms as they relate to your cash flow issues.

What does my banker look for?
Before deciding whether to extend credit, bankers will:

1. Determine if the borrower is an honest and creditworthy individual.
2. Determine if the borrower is a capable manager.
3. Understand the specific purpose of the loan.
4. Understand the sources and plan of repayment.
5. Evaluate all collateral and backup sources of repayment.
6. Find that the loan’s purpose, sources of repayment and collateral are acceptable, reasonable, practical and accomplishable within the normal framework in which the borrower operates.

Each is equally important, and we want to examine these aspects as they relate to cash flow.

1. Being creditworthy implies that your trucking company has a history of repaying loans as agreed. That means your company had sufficient cash flow to make the payments.
   
2. Being a capable manager involves understanding and using sound cash management practices.
   
3. The specific purpose of the loan is to help you purchase something. The implication is that you understand basic financing and are requesting the right loan for the right type of need.
   
4. The plan of repayment can be translated, “How does the company’s projected cash flow correspond with the required repayments of the loan?” Is there enough cushion in the plan if something goes wrong?
   
5. For collateral a banker looks for cash reserves or solid equity invested in the business in the 30 percent range. If that’s not there, the banker looks at how much cash the owner is willing to put into the deal or how much cash the owner has elsewhere to back up the deal.
   
6. A banker wants to know that your trucking company’s normal operations will repay the loan. He won’t lend you money on the hope that you will win the lottery. The loan is based on future cash flows from your normal, day-to-day operations, considering a reasonable expansion or other loan purpose.

Float
We first introduced float in Chapter 7 when describing how to time disbursements. Float is the difference in the cash balance in your company’s records and the bank’s records. For example, when you cut a check, you immediately record your check in the checking account and decrease the balance. But the bank has yet to receive the check from the supplier to deduct it from your account. During this period, you are floating checks, and there is money in your account. Some forms of check floating are illegal, however. Check kiting is the intentional deception of the bank on the true account balance.

You should legally increase your disbursement float and decrease your collection float. Stretch out the time it takes a check you write to clear and shorten that time for a check you receive. Techniques to accomplish both of these concepts are described in Chapters 6 and 7.

Bank fees
Banking fees can be difficult to spot. By working with your banker, you can learn what you must do to reduce them. Fees to look for include:

• Compensating balances – A bank may require you to maintain certain balances in non-interest-bearing accounts to secure loans. These balances can be costly since the bank requires you to forgo interest on some of your idle cash. At the same time, the bank has your cash to invest.
• Early loan repayment fees – A bank may assess a fee if you pay off a loan early so it can recoup some of the lost interest.
• Closing charges – Banks often assess fees aimed at recovering the administrative cost of making a loan. You must pay closing costs when you take out a loan, and rolling over a short-term note often draws a charge as well.
• Transaction fees – Banks charge fees for things like wiring money, processing checks and issuing money orders. Business customers often pay these fees monthly.
• Returned check charges – If you deposit a bad check, you might incur a fee, which is limited by law and ultimately can be passed on to your customer. Often, however, these fees are nominal, so you might end up covering most of them.
• Account maintenance fees – Banks often charge you money, such as a monthly service charge, just to keep your account open.

Banks have become extremely competitive on fees, so shop around and talk to your banker about ways to reduce them. Price shouldn’t be your sole factor in selecting a bank, however.

Banking services
Many of the charges discussed above are for items that don’t benefit you. But banks also provide valuable services, many of which cost little or no money. Services that banks offer include:

• Cash management specialists – Many banks employ certified cash managers trained in the techniques successful companies use to manage cash. Ask your bank’s specialist to review your practices and suggest improvements. This is often great advice at little or no out-of-pocket cost.
• Overdrafts – Occasionally you may miscalculate your float time, incorrectly write a check at the wrong time or simply find yourself in a tight cash flow situation. Your bank can provide overdraft protection by clearing checks that you write without sufficient funds, charging you either interest or a fee. Either way, the bank is helping you through the situation.
• Uncollected checks coverage – If you obtain this service, when you deposit a check you almost immediately have access to the funds. Banks normally require waiting periods of varying lengths. After the bank receives your deposit, it must obtain the funds from the deposited check’s account at another bank. With uncollected checks coverage, you have the funds to run your business. In essence, it’s an interest-free loan, but don’t feel guilty about asking for it.
• Lockboxes – A lockbox is a system to collect payments from shippers faster. You rent a post office box or special mailbox – or perhaps several if your customers are spread throughout the country – that’s monitored by your bank or another third party. You direct customers to mail payments to your lockbox – or nearest lockbox if you have more than one. The bank opens all the mailed-in payments, deposits them immediately and sends a report of the daily deposits and other information. Lockboxes eliminate processing by your employees and reduce collection float because payments are deposited immediately. Evaluate the cost carefully. Franklin Plewa, author of the book Understand Cash Flow, says that less than 5 percent of small companies use lockboxes due to cost. Mostly, medium-size and large companies use them. Even so, if you have shippers all across the United States, at least investigate the pros and cons. A lockbox might cut three to five days from your accounts receivable cycle, so the cost of a lockbox could be far smaller than the cost of carrying those receivables with bank debt.

Evaluate your banker
Often, business owners believe that their banking options are limited. In truth, there are probably hundreds of banking or related financial institution options for creditworthy trucking companies. Find the financial institution that will meet your needs from a cost and quality perspective. There are many good lenders, and there are some great ones. The great ones may cost a little more, but they may be the saving grace of your company one day. They also may help you increase your profits by helping you stay in shape financially.

In Summary
Lending rules are designed to help banks finance successful companies. Understanding how your lenders view your company can give you clues to good cash flow management techniques. And understanding the terms and available services could give you an edge in your cash-management strategies.