In a preview of his Business & Industry column in the spring 2021 Pennsylvania CPA Journal, Barry M. Pelagatti, CPA, a partner in the audit services group of RKL LLP in Exton, Pa., discusses the importance of cultivating stronger relationships with your organization’s lenders, especially during times of economic upheaval.
By: Bill Hayes, Pennsylvania CPA Journal Managing Editor
In the Spring 2021 Pennsylvania CPA Journal Business & Industry column, Barry Pelagatti, CPA, a partner in the audit services group of RKL LLP in Exton, discussed a series of ways to ensure positive relationships with your bankers and lenders. These tips include being transparent, broadening connections, and remaining engaged, along with many more.
Before we get into some of the tips you have for maintaining positive banking relationships, can you tell us a bit about some of the challenges to banking relationships that organizations have faced in the last year, especially with COVID?
[Pelagatti] Probably to a person, COVID has really just brought to the forefront, for both the banks themselves and also all of us as customers of banks, that it's not just about what do we need today but it's absolutely also about what could we need in the future and how are we best prepared for items that are thrown at us that could turn our traditional business model somewhat on its ear. If anything, it's taught us to take that Boy Scout approach of always be prepared and making sure that when we have needs we're at the ready with the information a bank would want to have to be able to help us navigate these uncertain waters.
You talk about the Boy Scout rule there: always be prepared. In the column itself, you talk about the importance of getting prepared when dealing with bank representatives. The question I had is, what exactly do businesses have to be prepared with and for? Is it certain documentation? Is it questions they're going to be asked? What do you think it is that they're preparing for?
[Pelagatti] I'd say it's a little bit of everything. It's definitely, at its baseline, documentation, because I think, as customers of banks, we all have to understand that the banks have to navigate the regulations. They have to make sure they're complying with all of the parameters they have to deal with, and the documentation for when formal requests are made for any access to liquidity, that will always continue to be paramount. However, what we're also trying to have the borrowers understand is that banks, they want to be able to provide as much value as they can. The more insight you can give them into not only, let's call it, your day-to-day operations, but also your short-term and longer-term strategic plan, that's going to give them the genuine opportunity to ensure that they're aligned with you and the services that they offer.
Number one, that you're aware of them, because I do think a lot of borrowers aren't necessarily aware of the services that their banks do and do not offer. But also it will give the lending relationship officer the ability to give you some perspective on where they may not be able to be of assistance, and I think the pandemic really brought that to the forefront with the PPP program and the fact that banks that have heavy focuses on small-business lending, where they felt much better prepared to provide those funds, where others who don't typically do that had to play a little bit of catch-up on the front end. The more that you're transparent and not only talk about your normal documentation and operational needs but also your growth and your strategic goals, it's going to let you know if you can get everything you need from your current providers.
As I think about asking this next question, "Why is it best to be fully transparent with the bank?" part of me is thinking, "Well, if you're not, it might be a crime or something like that." But what do you risk if you're not fully transparent with the bank?
[Pelagatti] I think that the risk is an interesting word there because I think the risk, to the point that you just alluded to, it's not necessarily immediately a legal risk that you're going to be doing something that was perceived to be inappropriate. I honestly think the greater risk is that you may find yourself surprised, that if you don't share as much as you feel you can share with your organization, and I don't mean that you're going to be guarded, but just that, to anticipate the things that you're talking about with your management team and with your board and with your employees, if you can let the bank know the same types of information, they're going to be able to tell you, again, the products that they can offer that may help you achieve those goals and also the products that you may need that they don't offer.
I do think one risk is that you're going to find yourself somewhat strategically handcuffed if you're not overly transparent. Of course, I don't want to temper the fact that you clearly have to provide banks with everything they need to be able to appropriately underwrite your documents. If you don't do that in an organized and timely fashion, you also run the risk of losing out on maybe the funds that you may be hoping to get or potentially not getting the same pricing you could get if you provide everything they need. But I think that the fundamental risk is really that you can just find yourself having a need that you can't timely resolve if you're not transparent with what you're facing on a day-to-day.
In the area of broadening connections, why is it important to ensure that your organization doesn't have just one person that's working with the bank, and would it be wise to work with more than one bank?
[Pelagatti] This is interesting because this is where I think my perspective is, I don't want to call it unique, but I think maybe it is something that is evolving. In the past, I think a lot of organizations, if you would say to them, "Who's your bank?", they would give you the answer. "Hey, this is our bank. This is who we use." And if you were to talk to the bank, they typically would have a lender that would be associated and it would be this one-on-one relationship. What I've seen happen in the 25 years that I've been working with organizations in the financial industry is that banks have become more complex. They're offering a lot of different products and, many times, the lenders are siloed in certain areas so there is more of a team approach on the bank side, but almost everyone goes back to the roots and there is usually one primary point of contact.
Well, what happens if that contact leaves the organization? You then have to find yourself reintroducing yourself to the bank that maybe you've dealt with for a long time. The other side of that coin is that, in the past, a lot of times banks almost used to have an expectation and, in some documents, you still see almost stipulated requirements that, "Hey, we've provided you this funding." If you would go get funding from any other institution, you could either find yourself formally, potentially, not compliant with a restrictive covenant saying, "Before you can take out other borrowings, you need to clear them through us." Or you may just find that you're kind of boxed in where you feel pressured to only work with that one bank. We're really just encouraging going back to the transparency that we just touched upon.
If you've got good relationships with not only your lender but also the organization and others, number one, you can talk about your needs and they can tell you where they can fulfill them. But number two, you can talk to them about, "Guys, you're going to be our primary, but there may be other things we do." Maybe you need asset-based lending and the primary bank you work with is more comfortable with real estate collateral or maybe asset-based isn't their expertise and you may be able to find a secondary relationship that mutually works for all parties involved because your primary doesn't take on risks they're not comfortable with, but yet you still also are fulfilling the liquidity and the operational needs that you deal with on a day-to-day.
You discuss the importance in the column of staying engaged with your banker or, as we talk about there, your banks. Does that mean staying engage as in networking opportunities, or is it more along the line of how you should reach out to them, such as whether it be by email or by phone? What's the focus there?
[Pelagatti] I almost look at this as any relationship. If it becomes purely transactional, 95% of that time that may be enough. Like, "Okay, we need this. We call this person. We process this transaction. Everything is fine." But where I think that the broadening of the relationship expands is when things become challenging. Again, go back to the pandemic that we're all dealing with right now. I don't know how many institutions thought, back at the end of February of last year, that they were going to find out two weeks later that their operations may be fully shut down and they were going to all of a sudden realize that, "Hey, we have enough cash on hand to cover maybe one or two payroll cycles." If you had thrown that out as a hypothetical a year ago, a lot of organizations would have probably said, "Well, what are the odds of that?"
But now I can tell you, in finding thousands of companies that had to call upon their bank immediately, all pretty much on the same day, I would probably speculate that if you're an organization that's very transactional, you probably got put on the list. But if you're an organization that's always reaching out and always talking and always engaging with your institution, when you make that phone call, odds are you knew of more than one person to call and they probably said, "Hey, this is a group we talk to all the time. We have to make sure we get them what they need."
At the end of the day, the banks are going to want to service all of their customers. But we're all talking about human beings and human nature is going to be, if the phone rings and they recognize that phone number and they know it's a person that they talk to when times are good, you're probably going to move up the list when times are bad to get a response more quickly. And if you've been transparent, they're already going to know everything that's going on with you to be able to make decisions to help you more quickly.
I found this particular line very interesting in regard to perhaps being able to renegotiate your deal with the lender: "Your lender would much rather redo your deal than lose you to a competitor." Is that something that a lot of businesses may not be aware of? Do they often think that they're just locked into the number that they came up with when they first started talking to the bank?
[Pelagatti] I would suspect that that probably is the perspective of most borrowers that ... think about as us as individuals. We sign a mortgage, it's on a 30-year mortgage, rates are set, and you start paying that mortgage. Very seldomly, does anyone just let it ride for 30 years. I mean, goodness, 30 years ago, mortgage rates were probably 14, 15%. Now, they're down close to 2 or 3%. The bank is no different. They have an obligation to their shareholders, if applicable, to their members, to their owners, to maximize their return on assets and return on equity. Money is coming in. Most banking organizations are flush with cash right now, so their primary focus is wanting to lend it out. If they get a phone call from one of their customers saying, "Hey, we want to shop our rate. We think we can get a better rate down the street because times are good," that bank is going to want to work with you because if you cash out your loan, they're sitting there with cash, it's earning very little for them, and they're going to have to redeploy that in the market.
If it's purely a rate or we think we can get a better deal, always start with your bank. It's no different than when you call your cable company and say, "Hey, are there any specials out there; can't you do a little better?" The other side of that, and where I think borrowers sometimes struggle, is when times are bad. They may be afraid to call the bank, especially if they haven't been fully transparent up until the time kind of a curveball gets thrown at them. That bank still has an interest in, they don't want to go after your collateral. They don't want to foreclose on your property. They don't want to have to figure out, "Well, how are we going to recover our principal?" They would most likely be much more inclined to talk to you about saying, "Well, what are you able to do? How can we rewrite the underlying paper to make it work so that cash flows?"
Because while margin is always a critical factor for lending organizations, they are also not in the business of wanting to figure out their own extended workout plan. If you're comfortable reaching out and just saying, "This is where I am. Can't we refine some of this?" there are parameters that banks have to work in. There are a lot of accounting mechanisms and regulatory items they need to make sure they address but they're always going to be inclined to want to keep cash flowing before they lose it or before it's too late and they find out that they've become like a sheriff who has to come for close on collateral.
How would you say that the current business environment brought about by the pandemic has affected the overall state of business and banker relations? Has anything changed there?
[Pelagatti] Wow. It may be easier for you and I to list out what hasn't changed versus what has changed. In all seriousness, I would say one, let's call it, silver lining that I think has really come out of it is that I think all entities have understood that they need to have a greater appreciation for liquidity and cash flow and kind of the emergency scenarios. And I think they are going to come out of the pandemic having a much better understanding of, let's call it, their burn rate, and how is their business really impacted by slow down? Where I think we have to grow on that pivot point is that's where your transparency can elevate with your bank. You are now at the position where you can say, "Here is where we are operationally. Here is how our business model has changed. Here is how we're going to move forward."
I think organizations are learning to run leaner. They're learning to run remotely, where applicable. They're learning what their absolute essential needs and nice-to-haves are. I think it's going to allow banks and borrowers to have much more transparent conversations because, a year ago, when we talked about disaster plans or business continuity plans, everyone was thinking in terms of hypotheticals. Well, we've all, as a world, lived through one now and I think it's going to make for much more tangible, meaningful conversations that we need to learn from. I think it's going to probably make borrowing maybe a little bit more discussive or conversational on the front end to ask all the right questions to get to the right products on the back-end.