Problems with Your Bank?
No Man’s Land (NML) is that not-so-magical place where an emerging growth company cannot successfully be either large or small. One of the key factors for companies in this phase of their evolution is to have the funding and financing (short and long term) to support the needs of both current operations and growth. Key to the availability of funding is the perception of risk that banks and other potential funding sources have of your company and its operations.
So the decisions that you make to reduce both the reality and the perception of risk are critical to your progress through NML. But even if an emerging growth company CEO and Board make 
all the right decisions to ensure the soundness of their business strategy and plans, they still may not get the support they need from their bank. The bottom line: you may not get the credit exposure or terms that you are convinced that your company deserves.
One reason you may be having problems with your bank? Your bank might have some NML issues of its own. They may have grown larger than they were when you first started working with them—and be struggling with problems like developing their infrastructure and systems and creating customer/ account relationship mechanisms.
Meanwhile your bank’s success in getting out of NML may have a significant impact on your success in crossing NML. Your bank’s ability to cope with the challenges of its own NML may affect its perception of risk in your company and its willingness to finance your operations and growth.
How the 4 M’s Impact Growing Banks
As an example, consider a small bank that began its existence delivering highly personalized service to a select group of customers. Its value proposition included guaranteeing access to the bank’s decision makers and low levels of paperwork and inconvenience. You chose them to finance your company specifically because of this focus. The bank becomes successful and starts to accumulate growth, earnings, capital—and returns to investors. While this is fine in itself, it can lead to the consequence that the bank now must have further growth in order to maintain consistent returns for the original investors. As the bank grows, it must find additional customers or investments to create more earnings. That, in turn gives rise to the need for additional people, technology, organization, processes, and satisfaction of regulatory requirements.
Why Banks Are Especially Vulnerable To No Man’s Land
There are various reasons why your bank may find itself in No Man’s Land:
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As intermediators of a basic commodity (money), banks work with very thin profit margins to begin with. In order to return risk appropriate market rates of return to investors, high levels of leverage are required.
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It is critical that the banking system as a whole not be subject to failure and therefore that it be regulated to allow it to function in ALL economic circumstances. Naturally, this regulation restricts some operating options that would place capital and depositors’ money at unacceptable levels of risk.
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Volatility in financial markets imposes an additional level of risk on bank financial structure exceeding that which most companies encounter.
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Thin margins, regulation, and volatility require banks to assess, accept, price and manage risk differently than non-financial businesses. And your company constitutes risk at some level of acceptability.
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Overall economic factors, especially in the area of available liquidity and the bank’s own need to fund its operations and growth may well work against a growing company’s needs for funding as the bank manages its position according to the factors above.
My next article will present an action plan for an emerging growth company to respond when it starts to experience problems related to its bank’s growing pains in No Man’s Land.
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Contact Ted at ted.parrish@newportboardgroup.com
image credit: How Stuff Works
