Jeff Judy

Jeff's Thoughts - September 28 , 2011

Why "Compromise" Is Not A Dirty Word

You meet with the prospective borrower, work through all the analyses, and write up an agreement that perfectly represents the interests of the bank. You have practically eliminated risk, you have maximized profit from the transaction, and you have terrific controls in place to make sure the borrower does not go astray, at least, not without you knowing about it instantly.

It's a great deal, but it does have one small problem: the borrower will never sign it.

Before the economy tanked, of course, borrowers were cheerfully signing agreements that maximized the benefits to them. They got wonderful pricing (in the name of competition), and found very little demanded of them in the way of reporting or constraints on their management practices.

But the bank won't sign those kinds of agreements anymore, and, of course, we shouldn't have been signing them back then, either.

If you have been in this business a long time, you are keenly aware of how the pendulum swings between the borrowers and their banks. And it is certainly the case that we have to adjust our standards and practices to fit market and economic conditions, there's nothing wrong with that.

But I have noticed that the really successful bankers know that there is a "sweet spot" where most of the bank's interests and most of the borrower's interests intersect. These are the credit staff who quietly chug along year after year, winning business from borrowers at the same time that they rarely deliver a bad credit to the bank.

They are the people who know that you find the "sweet spot" through negotiation and compromise. And yes, given today's political climate and what we hear on the news every day, you might think I just swore!

I'm not here to argue about whether compromise should be a dirty word in politics today, but I am here to tell you that compromise is at the heart of sustained profits from commercial lending.

The concept of compromise is relatively simple: you get less than everything you want, and I get less than everything I want. That's where the "sweet spot" is, and you are much more likely to find it if you think explicitly and systematically about "negotiating the best compromise" rather than "making the best deal."

Frame your negotiations with the borrower with these elements:

Negotiating the terms of a credit transaction is one of the most important things a banker does. The sum of all those individual transactions determines what your bank's credit portfolio looks like now, and next year, and the year after that.

It is certainly much too important to leave to the "seat of the pants" approach. Knowing that you are going to end up with a compromise, and actively seeking one, will save you a lot of time and effort. And it will probably save you from losing some good business, and booking some bad business, along the way.