Monetary Wisdom - October 2008

By Charlie Ragland

Developing and managing banking relationships are critical to the success of every small business. The banking process is often misunderstood. The mission of the traditional regional bank or local community bank is to generate earnings by collecting deposits and making loans. The banks have a small room for error and absorbing bad debts can threaten the bank’s stability. 

Banks are selective about their commercial banking relationships and the types of loans they approve. They fear losing money by making bad loans to companies that default on their loans. The bank seeks to avoid risks by incorporating every conceivable safeguard. They focus on the client company’s loan coverage, its ability to repay, and the collateral it can offer. Most important, the banker judges the character and quality of the key managers of the company to whom the loan is being made. 

Identifying the bank that’s right for you
As you begin to think about developing a banking relationship for your business, a good place to begin is with your professional network. Contact attorneys, accountants, and small business owners who have had dealings with various banks in the area. Look for people who have dealt with the banks in good and bad times. Schedule a visit with loan officers and explore their attitude and approaches to commercial banking relationships. Finally, ask for small-business references from the banker and talk to the owners of the firms. Throughout this process you will be able to identify those banks most likely to be interested in your firm and your business.

Look for banks that understand your business and the flooring industry. Many banks tend to specialize in specific industries; similarly, others avoid what they consider high risk businesses such as first time restaurants operators. If the banker understands your specific industry, they are more likely to make quick and reasonable decisions.

Understand the bank’s perspective and its lending model. Every bank has different criteria for lending decisions, many are quantitative in nature. Credit scores and credit ratings will always be important criteria. Knowledge of the banker’s lending process can help you determine your fit with a particular bank’s business model.

Recognize your banker’s “sweet spot.” Look for banks that specialize in lending to flooring industry businesses. With a wide range of banking and financial institutions in today’s market, many focus just on small-business banking or SBA lending. It is always an advantage to have your loan decision made at the local level versus being sent to the loan committee located in a distant city.

Developing the banking relationship
Utilize your business network to be introduced to lenders who understand how to work the internal loan approval process. Commercial lenders are in essence relationship managers whose role is to support the client. An experienced lender will understand how to get special loan situations packaged and approved.

Consider the relationship development process with the bank as a sales mission and provide data that is required in a form that can be readily understood. The better you meet the needs of the banker, the faster and easier it will be to get a positive lending decision. In many instances your loan approval may be based on the bank’s knowledge of your previous success and capabilities as opposed to the merits of your specific loan request.

Recognize that bankers are trained to require two sources of repayment for loans. The primary source is cash flow and is backed by some form of collateral (accounts receivable, inventory, or fixed assets). Additionally banks often require a personal guarantee from the owner to ensure psychological commitment. 

View the banker as your business partner. Always be honest and straightforward when sharing information about your business. Invite your banker to visit your business so they can learn more about your operation. Always avoid late payments, overdrafts, and late financial statements. Always tell the truth, especially when things are going bad. Bankers are more likely to bend the rules if you’re honest and have an action plan for correcting a bad situation instead of trying to conceal the situation from them.

Don’t change banks for rates only; the relationship is worth more than that. Always request the amount of money required instead of “How much can I borrow?” Visit the banker face to face for important matters. Never be impatient or inflexible, and always thank the banker for their time and effort.

Applying for financing
Before you apply for financing, understand the business needs of the banker and the information they need to establish a relationship. Know how much money you need. Be prepared to discuss your business strategy and how the debt financing fits with your business model. The total amount of the loan request should take into account unexpected developments.

Communicate your plan to repay the loan directly. Understand that short-term loans are for seasonal inventory buildups. Financing for receivables is easier to obtain than long-term loans. Be able to demonstrate that you’re borrowing money to finance an activity that will generate enough cash to repay the loan. Have a contingency plan if things go wrong. Be able to describe potential risks and indicate how you will deal with them. Identify a secondary source of repayment.

Plan ahead. If you need the money this week, the banker will correctly assume that you’re a poor planner. On the other hand, if you need the money next month or the month after, you’ve demonstrated an ability plan ahead. Make sure you give the banker time to investigate and process the financing request.

Develop a well prepared business plan to answer the banker’s questions. The plan should contain cash projections, income statements, and balance sheets that will demonstrate the need for the loan and how it can be repaid. The lender will pay special attention to the value of assets and business cash flow. 

The lender will often review financial statements for prior years prepared or audited by a CPA, a list of aged receivables and payables, the turnover of inventory, and lists of key customers and creditors. The lender will also want to know that all tax payments are current. Finally, they’ll need to know the details of fixed assets and any liens on receivables, inventory, or fixed assets.

Focus on selling yourself and your abilities when establishing a banking relationship. Know the banker before you need to borrow money. Be professional and prepare a loan package. Refer others to the banker. Provide regular informational updates. Be honest in your business and personal dealings. Be prepared with your funding requests before the money is needed.