September/October 1995
Establishing positive rapport with your lender can be crucial to your business success, but good relationships don’t just happen. These tips can help you forge financial ties you can bank on.
By Kent Kiser
Kent Kiser is an associate editor of Scrap Processing and Recycling
Along with their relationships with their suppliers, consumers, and employees, most scrap recyclers count their relations with their banks or other lending institutions as a key to their business success.
And for good reason. After all, lenders control the financial resources that can make or break a recycler's purchasing or expansion plans, even its long-term viability. And a good relationship can be the deciding factor in whether a lender works with or against a scrap company in times of financial or operational crisis—when it's life or death for the recycler.
Even scrap firms that are, for the most part, financially self-sufficient can benefit from keeping a positive line of communication open with a lender, say recyclers and financial experts alike. "Your needs change from time to time in terms of cash, and the need for capital in the scrap industry has grown," explains Gregory W. Luntz, vice president and chief financial officer of Luntz Corp. (Canton, Ohio). "Even large scrap companies could require some form of debt financing to continue to grow."
While having positive relations with your lender is, by all accounts, a good idea (if not a necessity), forging such ties requires much thought and work.
By necessity, good relationships—business or otherwise—must be two-way, with participants on both sides working to fulfill each other's needs and expectations, as well as their own responsibilities. It's important, therefore, to understand at the outset what lenders seek: long-term customers that will be good credit risks, give them a respectable return on their loans, and maximize the use of their financial services. Put another way, lenders are "looking for ongoing relationships," says Debbie O'Meara, a vice president of Standard Chartered Bank (Los Angeles). "We don't want to reinvent the wheel every year, so we have to have some faith that a customer is going to last and not become a problem loan." Thus, demonstrating to lenders that your firm is that kind of customer is vital to achieving a positive lending relationship. And that takes education, communication, integrity, and more.
Education as Foundation
As a first step toward building a positive relationship, both recyclers and financial experts recommend giving your lender a basic education about the scrap industry. The reason: A scrap recycling business is usually "different than anything else the lender has in its house," says R.J. Wills, secretary/treasurer of A. Tenenbaum Co. Inc. (North Little Rock, Ark.).
Unless a lender has already worked with scrap recycling companies, for example, it's a good bet the lender has little or no understanding of recycling processes and equipment, the difference between suppliers and consumers, or the fact that scrap is a commodity identified by various grades. "Don't assume lenders know everything there is to know about the industry," O'Meara says. "They'll do their homework, but there's going to be a learning curve."
Also, Wills emphasizes, your loan officer must know enough about the industry to be able to adequately represent your financial requests in front of a loan committee. "The loan officer is my eyes, ears, and mouth at that loan committee meeting," he asserts. "It's my responsibility to see that the officer has all the right answers."
One way to help lenders learn these answers is to provide them with articles and publications about the scrap industry. Arnold Gachman, president of Gachman Metals & Recycling Co. (Fort Worth, Texas), for instance, gives his lenders a copy of Scrap Processing and Recycling, while others frequently distribute "Scrap: America's Ready Resource," ReMA's primer on the scrap industry for lay people. "These publications show lenders the equipment and materials, give them a familiarity with the language, indicate how the markets operate, and help them understand the issues affecting the industry," Gachman notes. In addition to raising the lender's scrap IQ, such publications reassure the lender that your company is part of an established, beneficial industry.
During this education process, make sure you offer a balanced picture that presents not only the industry's strengths—resource conservation, energy savings, and so forth—but also its idiosyncrasies. In particular, Luntz notes, "You have to be very open about the cyclical nature of the business." As Wills asserts, "You've got to realize that you're talking about a partnership. The lender, in effect, becomes a partner with you in your business, with a vested interest in it, so it behooves you to educate the lender to the fullest extent possible."
A Company Introduction
The second part of the education process is to help the lender get to know your company from the inside out. One of the best ways to do this is to take the lender on a plant tour, starting at the scale and going step-by-step through the buying, processing, and selling stages. "You have to move them from the junk dealer mentality to the recycler mentality by showing them what your material is worth and what you do with it," Wills notes.
Luntz, who has given his share of plant tours for lenders, adds, "It's always helpful to take loan officers to your plant so they can watch the equipment operate and see the inventory. Tours give them a handle on where their money will go." Adding a banker's voice, O'Meara notes that "lenders always like to take tours of operations. Since we don't manufacture anything, we enjoy visiting people who do."
For lenders, getting to know a company also means learning about the firm's management approach, and most, in fact, place great weight on management strength when considering potential customers. "Quality of management is extremely important," O'Meara says. "The lender always has to have a comfort level with the management that's in place."
Dick Fletcher, a senior managing director of Bank of America ( San Francisco ) and head of its financial institutions group, agrees, stating, "Banks must be convinced of the vision and strategy of the company's management—that it's looking into the medium and long term, not just the short term." To this end, discuss your man management philosophy with your lender and, perhaps, develop a written presentation that explains your business, the risks—market or otherwise—it faces, and how your management approach mitigates those risks.
As part of this management introduction, you may want to introduce your lender to all of your company's principals and have them make presentations about their niches. Lending officers often "like to see the other principals of the business, not just the CFO," says Domingo F. Stem, a vice president of Standard Chartered Bank (New York City). "Banks want to feel comfortable that a company's primary executives are doing the right thing, and they want to hear that from the executives themselves."
The education process should flow both ways, of course, which means that while the lender is getting to know you, you should "try to get to know them the best you can," Luntz advises. "It's helpful to get to know not only the account representative, but also their superiors and, if possible, the top people at the lending institution." In particular, you should try to identify the organization's lending philosophy and determine whether the loan officer would be a dedicated advocate for your financial needs.
Meet Your Obligations
Once you've established a relationship with a lender, you must make it your top priority to fulfill all of your obligations. "You can't forget that your relationship with your lender is a professional business relationship," Gachman states, stressing that "a loan agreement is a very serious legal document that both parties must live up to."
Above all, this means submitting all required reports and information in a complete and timely fashion, whether you're talking about monthly, quarterly, or personal financial statements, or reports on collateral such as inventory or accounts receivable. Some recyclers suggest even submitting nonrequired financial information to reassure the bank that your business is healthy and, hence, their loan is secure. "Lenders have to feel comfortable with their relationships," Wills asserts, "because if they don't, they could do something at the most inopportune time that could end up hurting you."
The worst possible thing you can do is withhold information from the lender or submit inaccurate data, recyclers and lenders assert. "You should always be very straightforward with your financials and work to eliminate all potential doubts the lender could have about your information," Luntz says. From a banker's perspective, Fletcher confirms this, noting, "The most important element in your lending relationship is the integrity of your information. The lender wants to feel they can rely on the customer."
Communicate
Recyclers and lenders agree that communication is key to the success of a financial relationship.
As a general communication rule, O'Meara says, "It's always better to be upfront about whatever situation you're facing." Or, as Wills puts it, "You have to do everything you can to keep your lender apprised of what's going on." This means telling the lender about existing or anticipated internal and external changes that could affect the financial health of your business or the industry as a whole.
"When you see business conditions slowing down, for example, tell the lender how that could affect you and what you intend to do to meet that change," Gachman suggests. That way, Luntz adds, "whatever happens, at least the lender knows you saw it coming and you're managing it." Wills supports this point, offering, "We give our lenders the good and the bad. If you don't do that, then there will be a time when the lender will be disposed to cut-and-run, basically because they don't understand. The better informed they are, the smoother your relationship will be."
You should also keep your lender in tune with your future business plans. "Today's lenders like to achieve what's called a 'share of mind' with their customers on what they're planning," says Fletcher. "We want our customers to trust us enough to share their visions and strategies. Only that way can we help them address how their desired growth can be financed."
To stay connected, of course, you need to talk with your lender regularly, by phone or in person. Gachman, for one, says he has lunch with his loan officer three or four times a year to discuss a range of financial issues. Wills, for another, says he also talks with his firm’s lenders at least “on a quarterly basis about what’s happening.”
Among other advantages, close communication helps eliminate surprises to both parties. This is especially important to lenders, who dislike surprises for the simple reason that financial surprises tend to be bad. “Too big a surprise in either direction—good or bad—can concern a lender," Gachman says.
Beyond these more-specific issue-oriented discussions, Fletcher suggests recyclers sit down with their lenders at least once a year to conduct what he calls a "relationship review." In this meeting, both parties can discuss what they like and dislike about their interactions and how they would like to change the relationship-if at all-to better satisfy both parties.
Relating in a Changing Market
Building and maintaining good relations with your lender is never effortless, but the task can become more challenging during difficult economic times or when the scrap and/or financial industries undergo significant changes.
Such was the case in the late 1980s and early 1990s, when many lenders were grappling with problems related to the savings- and-loan crisis, failed leveraged buyouts, and the widespread devaluation of commercial real estate. These problems, coupled with an economic downturn, created a "credit crunch" that made it difficult for many businesses—including scrap recyclers—to secure loans.
In recent years, lenders have largely worked through these problems, helping bring about a much more positive lending environment. "The credit crunch is very much over," Fletcher says. "Lenders see a stronger economy and want to lend to good companies." Many lenders, in fact, are "starting to get more aggressive in how they're structuring loans and, in some cases, are willing to live with fewer protections," says O'Meara.
The recent rebirth in the lending industry has brought about what O'Meara calls "merger mania," with many large institutions gobbling up smaller ones to realize better economies of scale, as well as more efficient and cost-effective use of capital.
While these mergers are positive in some ways, they can negatively affect recyclers' relationships with their lenders. "I think you lose a lot of close banking ties when banks merge and loan officers are either transferred or change employers," Luntz asserts. "I also think there is a growing tendency for lenders, as they grow, to look strictly at a customer's numbers."
Another change can be seen in who, exactly, recyclers are establishing lending relationships with now, compared with years ago. Traditionally, recyclers have dealt almost exclusively with commercial banks, but that situation has been changing, as many banks have opted to do less general loan activities to focus their loans on specific business segments or offer a broader array of financial services. "Historically, banks have been used to plug the hole on the debt side, but we can now do a lot more to help companies raise capital," Fletcher asserts. "The difference between commercial banks and investment banks is becoming somewhat blurred."
As banks have been redefining their lending role, a slew of non-bank institutions such as insurance companies and investment firms have stepped in to compete with banks in many lending areas. "These institutions are more narrow in the type of market they want to lend money to," Luntz notes. "But they all lend money now, not just banks." For scrap recyclers, these new lenders offer more financing options—as well as new relationship challenges.
Whatever the changes in the lending industry, however, recyclers and lenders alike say it's possible to establish positive, trusting, and mutually satisfying relationships if both parties are willing to make the effort to understand each other, communicate, and live up to their respective responsibilities.
The recycler-lender relationship is "a partnership, there's no question about it," Gachman reaffirms, concluding, "You've got to treat your lender the same way you'd treat a good customer." And, if you do, your lender could-like a good customer- stick with you through the years and always keep the door open.
Establishing positive rapport with your lender can be crucial to your business success, but good relationships don’t just happen. These tips can help you forge financial ties you can bank on.