To Grow Your Business, Get Next to Your Banker
Many things are important to nurturing your business, growing it, and reaching the next level – whether it’s larger quarters, bigger staff, or even adding new locations. Of course, you need a sound business plan, a professional management team and a good customer base.
But you also need one more thing, and that’s a partnership with your banker – at times, the most important component for future growth.
In fact, forming and maintaining a partnership with your banker can be the biggest factor of all in your business success. Note that emphasis is on "banker" not "bank." In order for this partnership to work in your favor, you have to make it personal (as in people) and not impersonal (as with a building or institution).
You may regard your banker as just another service provider for your business, one that gives you an account, check writing privileges and payment terms – just as your tire supplier delivers tires. But smart, successful entrepreneurs know that the real value in any business relationship has to go well beyond the standard seller/buyer framework.
As with most any relationship you hope to benefit from, a successful banking relationship has to be built on trust. Your banker must trust you, you must trust him, and neither party should do anything to cast doubt on that trust. As with any trust-based relationship, it can take a while to build, but only a second to destroy.
At the same time, it’s important to remember that your banker is also a businessperson, so yours cannot be a one-sided affair. The best banker/tire dealer relationships are clear win-win partnerships. You don’t expect your tire supplier to "give away the store" to keep you happy, and your banker won’t either. If the cost of your happiness outweighs the profit potential of your banking business, you won’t have any kind of a bank relationship for long.
Why Start a Relationship?
Most people look at banks as a resource to simply house and transfer money and maybe earn a little interest on the side. You make deposits and write checks. Maybe occasionally drop some dough into a CD or IRA. Perhaps your business credit cards were initiated with a bank. That’s about the extent of it.
Many business people approach their banking relationships in an adversarial manner – loans come to mind. Face it, no one really ever wants to have to borrow money. The application process, including gathering all necessary support data, is tedious and time consuming. And, there is that chance your loan application will get stamped "REJECTED" in bright red letters.
But loans, as we’ll discuss, are a good way to start a true partnership with your banker. An icebreaker if you will, but only if you approach the process in that fashion. Otherwise, the loan process can still be seen as a negative.
Loans aside, there are many positive reasons to build a partnership with your banker. Banks today offer a much wider spectrum of services than many business people consider. Depending on the size of the institution – larger banks tend to offer a greater package of services than smaller, hometown ones ®“ expert bankers can also help with personal financial planning, business and personal investments, business and estate and tax planning, and much, much more. Some will even serve as your consultant in real estate transactions, purchases or buyouts ®“ even in securing outside non-bank investments.
A good banker will likely have also been exposed to numerous other businesses, and can offer insight, ideas and suggestions on a wide-range of business issues. Plus, being involved in the financial business, your banker has an inside track on new financial products, techniques and law changes and how these can be applied to your business.
Where to Start
As trite as it may sound, the starting point to having any banking relationship is to have a bank. That may sound crazy, but many small businesses don’t have "a bank." They just have a place that holds their money and allows them to write checks, as we discussed earlier. Some businesses may utilize several banks without thinking of any one institution as "our bank."
We’re not suggesting that you pick one and stick with it, though that may work in your favor. But to have a winning situation, you need to have a banker – not a bricks-and-mortar building, but a representative of the institution who is your personal contact. This is your champion, your go-to person, and you need to feel as comfortable with them as you do with your closest confidants.
Finding a bank/banker is relatively easy but it can take some time. Ask other business people in your area for a recommendation. Go to local banks and talk with them. Hold an audition of sorts by inviting local banks in – one at a time, not as a group ®“ to meet and discuss how they can help reach your business (and even personal) goals.
That last line is key. If you don’t have specific goals or banking requirements in mind, your meetings with bankers won’t produce much. This is where having an annually updated, solid business plan can be a huge asset.
Give your prospective bankers a chance to "kick the tires," so to speak, and invite them to your shop. Let them meet your staff and see how you do business. This is a great opportunity to really get to know each other and show them how your business operates.
This "inside view" allows them to get a good feel for your business and understand your products, market, customers, employees, etc. – and see where both future opportunities and potential shortfalls lie. All of this can help make the most gimlet-eyed financier a buddy.
Once you settle on your banker of choice, consistent communication is vital. Some entrepreneurs schedule a monthly meeting with their bankers. Call him more often than he calls you, not just with the good news but also the bad because bankers hate to be surprised and in the dark. Do lunch, or even dinner, if that works best.
Jump In by Borrowing
As much as you may not want to do it, sometimes you have to meet your future banker and partner on their turf. Inevitably, you will need a line of credit, even if just a small one to ease the pinch of a slow season or crimped cash flows. Or you might decide to expand your business and need a mega-bucks loan to make the move. Either way, you’re going to have to go to them.
The procedure for getting that loan or credit line can be tough going at first if you haven’t been building a relationship. Even if you have no plans presently to borrow against it, establishing that credit line is a good way to launch your relationship. After all, your business now has the bank’s attention.
Application for a line of credit is much like that for a building-expansion loan. Here’s what’s needed and what your banker will require before he becomes your partner in business: Three years of business financials – ranging from profit/loss statements to business and personal tax returns (if you’ve been in operation that long) ®“ are a must. You also will be required to provide details of your operation, such as:
®′ What products and services you sell, and how you do it.
®′ Competition situation.
®′ Forecast of where you and your market are headed.
How You Will Use It?
Along with the financials and description of your business, you must outline the intended uses of the line of credit you seek. If you’re presenting specific plans, make sure you have all the details in order and be ready to discuss all of the above with your banker. If you are not fluent with numbers, take your accountant along.
Once you have that line of credit, go ahead and exercise it even if you don’t really need the funds yet. Paying a bit of interest is worth it to establish a track record for paying on time. Remember, you’re after a win-win relationship, and doing some business with the bank is a strong starting point.
How much will a line of credit cost you? Well, it’s the cheapest way to get money unless you have a rich uncle. Washington Mutual, one of the nation’s largest banks, assesses an annual fee of $150 for a credit line of $100,000 or less, and .25% for amounts greater than that. Then the interest rate depends on your credit worthiness and the length of the line’s term, and at WM that rate is prime plus 2% to 5%.
Always ask for more money than you need, even though this boosts your costs. Going back to the well a second time can be difficult and embarrassing.
Recognize that you probably are going to have to personally guarantee any line of credit or loan. That means legally obligating your personal assets as collateral for the loan. But it’s only fair that you invest in what you are asking your banker to lend money to.
Another popular banker funding technique, besides line of credit, is the asset-based loan, often for an expansion. This one is backed by business assets like accounts receivable, real estate or inventory. Typically the banker lends up to 75% of receivables and 50% of inventory, with the latter often referred to as floor planning.
Don’t lose sight of the fact that the costs of a banker’s services are negotiable, just like everything else in the world. That includes the collateral required, the terms and, most of all, the interest rate. A few years ago, Money magazine surveyed the banker-lending arena and announced that a banker’s published rates "are for suckers." Rogers Bel Air, author of the best-selling book, "How to Borrow," urged negotiating a loan just as you would terms when buying a car or a home.
Funding May Be Easy Now
Getting funding from your banker right now could be easier than usual. Banks are flush with the deposits from shell-shocked investors pulling funds out of the slumping stock market.
But lending to you will not be the most profitable thing for the banker. Instead he/she wants to sell you services, plus make a return on your checking account deposits.
Small-business lending increased by 5.4% in 2001, the latest year reported. That was six times the increase rate of .9% for larger loans – those over $1 million, according to Small Business Administration (SBA).
The three top providers of small-business loans are Keybank National Association, Wells Fargo and NationsBank. To find out which banks are making the most loans to small business in your state, visit the SBA’s Web site at www.sba.gov.
Even with a lot of deposits, bankers are ever-more leery of some small business lending. Loan defaults in the last year have led some to stop offering the kind of credit small companies typically need (i.e. receivables financing).
Here are four No-No’s that will turn your banker off and prevent you from gaining a working line of credit – and creating that win-win relationship:
®′ Submitting financial statements late. Regulators check banker’s records at least annually. By not submitting your statements on time, you’ll create problems for your banker.
®′ Operating on uncollected funds. Too many businesses, immediately after depositing checks, begin spending those yet uncollected amounts. This deprives a bank of the interim income it should enjoy.
®′ Being unresponsive. Too often, a small business tightens up when asked for an explanation of its financial statements rather than quickly answering all questions.
®′ Ignoring the relationship. It’s easy to just forget about your banker until you need him. Too often you may hide behind e-mail and voice-mail messages instead of talking directly. Remember, you’re trying to build a relationship, and consistent communication is vital.
Your Banker Will Ask
"What’s your plan?" is among the first questions any banker will ask you. A five-year plan is what they’re looking for, according to Michael Butler, vice chairman of Key Business Banking in Cleveland. KBB is one of the nation’s largest multi-line financial services companies with over 200,000 small business clients.
Any business plan should speak for itself, say experts, and should clearly show your enthusiasm for your business and its opportunities.
For those working in a large market, an explicit business plan is especially important. In large markets, bankers are often unfamiliar with your business and your market community, so a solid, detailed business plan may be the only way they can become familiar with your company.
Butler also says the banker probably will ask you about the steps you need to take to fulfill your plan. Then there will be questions about how you stack up against your competitors and what makes you distinctive in the marketplace. You also probably will be asked to describe the depth of your management team, as well as your management succession plan – that is, if you have one.
You should welcome the intrusive questions by your banker. He will help you make sure your plan is sound, and may open the door to conversation about how the banker can help you reach your goals – which is your goal in the first place.
Here are five things a banker will focus on as he sizes up you and your loan application, according to the SBA booklet, "The ABC’s of Borrowing":
®′ What sort of person are you and are you able to successfully manage your business?
®′ What are you going to do with the money?
®′ When and how you plan to pay it back?
®′ Is the cushion in the loan enough to make allowances for unexpected developments?
®′ What is the outlook for business in general and your business in particular?
So, what if you are turned down? Determine what the problem is and then remedy it, says Paul Pustorino, managing partner, financial institutions practice for Grant Thornton, a leading global accounting, tax and business advisory firm. Before you can fix something, you need to understand it, and why it is broken. If refused a loan or credit line, ask why and seek details.
Being turned down can also help open banker relationship doors. If turned down, turn it into an opportunity by asking the banker for guidance in correcting any shortfalls that prevented approval. By allowing them to participate, they can learn more about your company and grow comfortable in dealing with you.
Things to Remember
®′ Sometimes your best banking option is not some large mega-bank, but rather a small "hometown" bank that is perhaps more familiar with your community and trade area. If dealing with a larger bank, look to the local branch for assistance instead of heading to the home office. Local banks and local offices are equally interested in creating long-term relationships with local businesses, something you may not find "downtown."
®′ Banks are businesses too, and they expect to make a profit. Experts suggest approaching a banker before you actually need one. Give them business information and financial statements, and invite them to management meetings. This will give them a chance to assess you and your business without the pressure of a loan decision, and may open the door to financial tools they can make available to help you meet current business goals. By giving them an early look, they can assess their profit potential with your business.
®′ Remember that banks are all about minimum risk, while private investors and venture capital groups are willing to accept higher rates of risk. Keep this in mind if you’re seeking funds for a potentially risky expansion. The good news: unlike private investments, banks do not want to own a piece of your pie.
®′ May-December romances with banks are never a good idea. Don’t go skipping from bank to bank. Like a marriage, any business relationship has ups and downs. Invest serious time up front to find your ideal banker mate, and work at building the relationship. Skipping off because you don’t like an answer won’t do your business any good. And, like the searching training time involved with a new employee, finding a new banker is time and money consuming.
But even if you do little of what this article has recommended, please determine to make your banker a buddy. And when you cross the street, so to speak, with a loan application, hold onto his hand.