You and Your Bank

There is no question about it: The economy has changed, the banking industry has changed, and traditional relationships between printers and their banks have changed. Helping printers find financing, employ strategic measures and keep strong cash positions has been increasingly popular. To explore the changing nature of bank relationships, we interviewed Kurt Knutson, president and founder of Freedom Bank in Kansas City.

From his experience in providing financing for printers, Knutson drew parallels between today’s banking situation and the 1980’s savings and loan crisis. He focused on the number of financial institutions going under, and the enforcement actions. “To put it in perspective, there are 8,300 FDIC-insured banks across the country, and there are 40 banks that have failed,” (as of late August 2009), said Knutson. “The overwhelming number of banks are doing fine.” The current economy and regulatory scrutiny also make banks very cautious about lending money even to their best customers. As Knutson said, “The dollars that are being lent are that much dearer to the banks, so they are looking at it from the perspective that they have to be choosy to get the return.” This situation has caused many printers not to get financing for recent equipment purchases or forced needed capital purchases to be delayed or canceled.

Some printers have resorted to using their lines of credit to buy needed equipment, hurting the flexibility in their cash flow. In addition, many banks are requiring printers to reduce the upper limit on their lines of credit, again losing cash flow. Once a printer uses up cash reserves and credit, there may be little alternative but to close the doors, as has happened for some 2,000 printing companies out of 35,000 nationwide. Most banks are looking more carefully when assessing viability, applying measurements that are more stringent. One of the most important measurements used by banks is covenants. The covenants could include:

$ Total debt to equity—If total liabilities are $2M and equity is $1M, the total debt to equity ratio is 2:1. While each company and situation is unique, we generally see this ratio below 3:1 in covenants.

$ Tangible net worth—This again varies greatly with each company.

$ Cash flow coverage—Cash flow coverage is determined as follows: EBITDA = Net income + depreciation + interest. Debt Service = Total of annual principle payments on debt + total of annual interest expense. The comparison of EBITDA to Debt Service is the Cash Flow Coverage ratio, which we normally see ranging from 1.2:1 up to 1.5:1.

Most large loans have a covenant that alerts the bank when the printer is not performing well. During these difficult times this has become a serious issue. If your bank is under pressure from regulators, they will be less lenient in overlooking violations. Violations mean the loan can be called and/or the interest rate increased. Trying to avoid such outcomes means spending more time and money communicating with the banks. So how do we get banks to respond positively to our financial needs? There are several steps to consider:

1. Increased communication is essential. Keeping your bank informed and updated of both good and bad news is important. Plans need to be developed, not only for the bank, but for your own survival. These should include income and expense projections that can be used to analyze cash flow and determine if it is sufficient to service the debt and working capital. A contingency plan also needs to be developed. Both should be communicated to the bank, making them aware that you have considered the various scenarios and are being proactive in planning your responses.
2. Be patient and be prepared. Negotiations with banks take longer than before. Focus on the operating side of your company when talking to them, showing where and how you have cut expenses, why certain expenditures are necessary at this time, and how a short-term investment will increase future profits.
3. Improve your management skills. Take advantage of the environment to plan, innovate and reorganize. Explore new markets to show you can change with the times, and share your vision—and success—with your bank.
4. “Cash is King.” If you have cash, keep it as cash, even if it means you get a smaller return on it in the short term.
5. Check the financial health of your bank. Visit the FDIC Web site (www.fdic.gov) for updates and resources on the banking industry to determine if your bank is undergoing enforcement activity. If you see (or suspect) it is in financial distress, consider developing a relationship with a more stable entity.