Managing bank relationships and credit lines
Banks trust most the relationships built before they are needed. Credit line planning, collateral structure and regular information sharing.
A company’s credit line is not opened on the day it is needed; it is built, together with a relationship of trust, before the need arises. A company asking its bank for support when cash is tight is in a much stronger position if the bank has received regular information for years and knows the business. In this article I explain how to manage bank relationships, how to monitor credit lines and why the financial covenants in loan agreements need close attention.
A bank relationship is not a supplier relationship
Many companies see banks simply as suppliers offering the cheapest interest rate and collect quotes every time they need credit. Price matters, of course, but a bank’s lending decision rests on what it knows about the company and how reliable that knowledge is. A bank relationship therefore has three essential elements:
- Regular and consistent information: sharing periodic financial statements, the budget and significant developments on a set timetable, without waiting for the bank to ask.
- Predictability: communicating credit needs in a planned way, not at the last minute. In a bank’s eyes, last-minute requests are a sign of weak cash planning.
- Giving bad news early: the risk of breaching a covenant, or an unexpected loss, should reach the bank from the company — not from the financial statements or third parties.
Periodic meetings with banks should cover the company’s performance, variances against budget, the cash flow forecast and the funding need for the coming period together. Having the CFO lead these meetings also matters for continuity in the relationship. I discuss the CFO’s role with external stakeholders in what does a CFO do.
How many banks?
Working with a single bank deepens the relationship but creates concentration risk: when that bank’s risk appetite changes, the company has no alternative. Working with many banks leaves each relationship shallow and increases the management burden. In practice a common structure, depending on the company’s size and needs, is one or two banks carrying the main relationship and a few banks in a complementary role. What matters is that total usage is not excessively concentrated in one bank, and that each bank knows why it matters to the company.
Monitoring credit lines
Credit lines are not only cash loans. Non-cash lines — letters of guarantee, letters of credit, FX dealing and derivative lines — can be at least as important to the company’s operations. Line monitoring should bring the following together in a single table:
- Line type and amount by bank
- Amount used and remaining available headroom
- Maturity profile and renewal dates
- Collateral and guarantees given
- Whether the line is committed or at the bank’s discretion
The last point is often overlooked. A line that exists on paper but can be reduced by the bank at any time should not be counted at full value as a liquidity buffer. The nature of the line should be checked in the loan agreement.
A hypothetical example: utilisation and concentration
The company and all figures below are hypothetical (cash credit lines, TRY million):
| Bank | Limit | Used | Utilisation | Share of total usage |
|---|---|---|---|---|
| A | 120 | 90 | 75% | 50% |
| B | 80 | 40 | 50% | 22% |
| C | 60 | 50 | 83% | 28% |
| D | 40 | 0 | 0% | 0% |
| Total | 300 | 180 | 60% | 100% |
At the total level, TRY 120 million of unused headroom looks comfortable. The detail tells a different story: half of usage sits with one bank; at bank C the line is almost fully drawn; and a third of the headroom is at bank D, which the company has never used and where the relationship is therefore weak. If bank A decides to cut its line at renewal, the company may not find it easy to close that gap quickly with the other banks. That is why a credit line report should show concentration by bank and the renewal calendar alongside total utilisation.
Financial covenants and their accounting effect
Especially in medium- and long-term loans, banks may require the company to maintain certain financial ratios — net debt/EBITDA below a set level, or debt service coverage above a set level. Breaching these conditions can lead to the loan being called before maturity.
Covenants also have an accounting effect. Under the 2022 amendment to IAS 1, covenants with which a company must comply on or before the reporting date affect whether a liability is classified as current or non-current; covenants to be complied with after the reporting date do not affect classification, but the related risks must then be disclosed. In other words, a covenant breached at the balance sheet date can move a long-term loan into current liabilities and suddenly damage the company’s liquidity ratios.
A hypothetical example: the loan agreement requires net debt/EBITDA not to exceed 3.0. The company has net debt of TRY 260 million and EBITDA of TRY 100 million, a ratio of 2.6. With net debt unchanged, EBITDA only needs to fall to 260 / 3.0 = about TRY 86.7 million — a drop of about 13% — for the ratio to reach 3.0. That margin is narrow enough to be consumed by a reasonable miss against budget. Covenant tests should therefore be run not only on past periods but on budget and forecast scenarios too. I explain how to measure debt service capacity in how to measure debt service capacity.
Cost is not just interest
Comparing credit offers on the interest rate alone is misleading. Commissions, fees, the cost of collateral, deposits the bank asks to be blocked and add-ons such as insurance can change the total cost markedly. Offers should be compared on an effective cost that includes all of these. I cover the risk of floating-rate borrowing in interest rate risk, and the risk of foreign-currency borrowing in managing foreign exchange risk.
Common mistakes
- Contacting the bank only when credit is needed
- Watching total utilisation without tracking concentration by bank and renewal dates
- Running covenant tests only at year end, when the bank asks
- Keeping non-cash lines and collateral given in separate tables, with no overall view
- Giving banks inconsistent figures at different times
Conclusion
A strong bank relationship is the most important resource to turn to when cash is tight, and it is built in good times. Regular information sharing, monitoring lines and concentration by bank, testing covenants on a forward-looking basis and assessing cost as a whole form its foundation. To spot a cash squeeze in advance, see early-warning signs of a cash squeeze. You can read about my work on bank relationships and funding structure on the cash flow management page.