From a CFO's perspective, the company is profitable, has positive free cash flow, and is growing sales, so the credit risk may be reasonable. However, a banker has a different perspective.
Every financial institution will have customers they like and customers they don't like based on their growth strategy, revenue goals, market share objectives and opportunity costs.
Economic and credit conditions also play a role. U.S. commercial banks, once eager to lend to businesses, have been less willing to lend recently. Higher funding costs, rising operating expenses, and declining deposit balances have kept banks' lending targets more modest. A cut in the federal funds rate by the Federal Reserve could stimulate lending, but it will take time.
But on the liability side, many banks are keen to take commercial deposits, a reversal from the pre-COVID era of ultra-low interest rates when financial institutions were turning away depositors.
Bridget Meyer, senior director at Redbridge Debt and Treasury, says all these factors change the face of a company's attractiveness to banks, and “that's important because we don't know when the next crisis is going to happen,” she says.
No company can meet all of a financial institution's requirements, but with attention to detail and flexibility, companies can improve their bank's customer profile.
At the New York Cash Exchange Conference (hosted by the New York Financial Management Association), Meyer and Brad Constantino, senior manager of global finance at Under Armour, outlined ways CFOs can keep bankers happy, get better pricing, and generally turn their companies into customers banks want to keep. They offered some advice:
Offer a deposit
Under Armour typically takes a low-risk approach by parking its excess cash in the financial markets for daily liquidity. But over the past two years, the company has been working with banks to understand its capital needs and become more flexible, sometimes parking “sticky” cash for a month, two or three months. That could help banks and allow them to offer higher interest rates to the company, Constantino said.
Gaining trust little by little
Maintaining your company's credit risk profile with banks is crucial. Keep an eye on your bank's internal credit rating, not just the rating agency ratings. “If you get downgraded, you're on the shortlist, and that changes your negotiations with banks a lot,” says Meyer. If you find it harder for bankers to sell you to risk decision-makers, consider shorter-term loans if possible, with a plan to fully finance in a few years, says Constantino. And when negotiating prices, keep in mind that the price should be attractive to both the bank and the borrower. “Everyone has to give in a little,” says Constantino.
Don't look for the cheapest funding
The above findings highlight the need to consider overall value rather than just borrowing from the credit provider with the cheapest offer, says Meyer. [a credit facility] “It’s like not restricting business,” she says. “The worst thing that could happen is that the company misses out on an opportunity. [its facility] The boundaries weren't flexible enough.' Consider negotiating collateral or other lending practices with your provider to get more flexibility out of your basic credit product.
Become a reputable customer
“The biggest factor is [customer] “Banks are starting to pay more attention to social media profiles: What is your company posting online? What is your executive team posting? Banks are watching, Meyer says. “Banking is a small community, so be mindful of how your reputation impacts your relationship with the bank.”
Allocation of ancillary businesses
Which banks in the company's syndicated lines of credit are taking borrowers' deposits? Which banks' cash management products are they using? “At least once a year, we go through all our banks in a spreadsheet to understand which bank is responsible for what business: bank fees, accounts receivable, cash management, FX, capital markets,” Constantino says. “What the bankers tell us is always different from what we show in the spreadsheet.” But, he says, the spreadsheet gives Under Armour a baseline to start the conversation. “I always tell the treasurer what we can offer them.”
Make the relationship profitable
Share of wallet has two sides, Meyer points out. Just as Redbridge advises companies on their banks, banks have consultants advising them on their customer base, showing them “all the companies and customer relationships that are not profitable,” she says. If possible, the CFO should know the risk-adjusted return on capital (RAROC) the bank gets on the relationship. The more side business a company provides to the bank, the more likely the relationship will improve the bank's internal profitability metrics. Industry also matters. When a bank looks at its overall risk, it may determine that it is over-risked in a particular sector, or that it would be better off lending to another company in the same sector. “You need to know how you fit into the bank's overall mix,” Meyer says.
Monitor ESG commitments
Many banks have made long-term pledges to align their lending with better-governed companies, especially on climate change. Some banks’ commitments have targets five to 25 years out, so change won’t happen anytime soon. But CFOs should be wary of banks that plan to allocate capital to reward greener credits and companies and penalize others. “Power, auto manufacturing, steel, aviation – all of these industries could be perceived as dirtier or less green, and some banks may be cutting back on their ability to lend to these industries,” she says. “If any of these industries are not attractive, aligning your ESG goals with your banking goals can tell a better story.”
Stay in touch
Long-term banking partners require ongoing attention, which can make the difference between whether the bank participates in your next funding round or turns you down. Constantino recommends keeping your story told. Share information like projections for the next three to five years, growth rates and strategic initiatives. “Spend time with your bank and pay attention to the details of your credit agreement,” he advises.
