Will you avoid the 'credit crunch'?

Lawyers might need a bank loan for any number of good reasons: to finance growth, recover from a disaster, meet unexpected expenses or purchase new technology.

For weeks, the daily news headlines have talked about the ongoing "credit crunch," with bank financing drying up. With this phenomenon in the backdrop, should lawyers be worried that they won't get the future credit they need from the banking system?

The simple answer is no — not if you have a good relationship with your banker. You may face a modestly higher interest rate, depending on circumstances, than you paid before, but you will still be able to get a needed line of credit.

Lawyers should educate their bankers on how their business operates — with cash flow, receivables, revenue and profit — in order to build a relationship of trust. Then, when "crunch" time comes, the foundation you've established will be one that you and your banker can rely on in a loan transaction.

Educating your banker means documenting clear plans for cash and receivables management, marketing and business growth, establishing your qualifications under the "Four Cs" test (character, capacity to repay, capital and collateral), and maintaining a high credit rating.

When you seek a loan, summarize concisely the purpose, emphasize the business soundness of your practice, the safety of the loan and the security that it will be paid back. If you've established the right banking relationship, your odds of receiving the loan will be good.

Don't neglect the personal side of this equation. Especially in this era of bank consolidation, when change and personnel turnover can occur quickly, you need deep and wide relationships with a bank. Don't limit yourself to your loan officer or branch manager. Getting to know a senior manager — a vice president or even the president of the bank — will help you in the long run, particularly if the bank is involved in a merger.

If your bank is doing the acquiring, you will be in a good position with a stronger bank that has new referral sources. If your bank is being acquired, you will need to know who the new players are. Your friends at the old bank can (and should be willing to) introduce you to the new team as soon as possible. The new executives should be receptive to you even if lending standards are tightening for other customers. Banks value lawyers as having good financial prospects, relatively low risk and good potential for new business referrals.

Building a mutually beneficial and effective business relationship with your bank is a critical step in helping any law firm survive and prosper when business conditions become tough.

Lawyers should think of the bank as a supplier. Suppliers provide lawyers with goods and services that allow the law firm to deliver quality legal services to clients. One of these suppliers, for any lawyer, should be the bank.

Good banking relationships provide the necessary funds and financial services that allow a firm to maintain itself despite the ups and downs of the economy.