Mark Twain apparently liked bankers about as much as I do. He’s widely quoted as saying:
“A banker is a fellow who lends you his umbrella when the sun is shining but wants it back the minute it begins to rain.”
If you’ve got a line of credit, you’ve got to worry about your banker. At least you’ve got to worry if you want to be sure you can use the line.
What’s the Forecast?
Realistically, sometimes it rains. For those of us who practice family law, the rains often come around December or January depending on how you do your billing.
For fixed fee firms like mine, we feel the slowdown in December when prospective clients delay their divorces until after the holidays. For us, that typically means a revenue decline of at least 20 percent. In some years, it results in an even bigger decline.
For hourly firms, the impact is felt in January when the December hours are added up and funds are transferred from the trust account. The typical transfer from the trust account to the operating account is reduced dramatically because those billing time have been taking time away from the office.
The Sky Is Falling
It doesn’t really matter when the revenue drop happens. What matters is that it feels like it’s raining. If it’s raining, then your banker might be getting ready to cause trouble. Your banker can pull the plug on your credit line if he gets nervous about your ability to repay the loan.
Today, bankers pay much more attention than they did in the past. They keep an eye on your account balances. They watch the flow of the money coming in and going out. They’re very interested in receiving current profit and loss statements and balance sheets. They actually read what we send them. That never used to be the case.
Bankers today will restrict or reduce your credit line if they have any reason to worry. You can’t count on them to understand the seasonality of your business. The bottom line is that they worry about the bank, not you.
How to Keep Your Credit Line, Come Rain or Shine
If you’re worried that your banker might be worried, then you may want to take action to ensure that you’ll have access to the credit line when you need it. That’s especially true when you know the need to draw on the line is fast approaching.
How can you protect your access to the line? That’s easy: take an advance on the line. You might want to take a full advance on the line. Once you take the advance, you’ll have the funds so your banker can’t take the money back. Be careful, however, about where you put the funds.
Some lending agreements contain provisions allowing the bank to seize the contents of your accounts in the event of certain conditions. For instance, if you bank with your lender, it can usually seize those funds in your account in the event of default. Some agreements allow them to seize the funds in circumstances other than default. Be sure you understand what’s possible under the terms of your agreement.
I know lawyers who take the full advance on the line, move the funds to another financial institution, and just let the money sit. They’re willing to pay the spread in the interest rates until they pay down the line. They see the small expense as a warranted precaution to avoid disruption in their business.
How cautious should you be in anticipating the actions of your bank? That’s a tough question to answer. It depends on your relationship with the bankers involved and the bank’s history in taking action like I’ve described. You’ll have to make the call in your particular circumstances. I will say, however, that banks behave differently—much differently—than they did in the not-so-distant past. They’re cautious, they’re careful, and they’re more much more willing to burn bridges to protect themselves. Do what you need to do to protect your business. Keep your eyes out for approaching dark clouds and hold on tightly to your umbrella.
