The WU KSBDC recently hosted a mini-conference on Access to Capital for Small Businesses. The event started with a panel of bankers discussing what small businesses need to know about working with banks.
An issue of importance to many small business owners is the need for capital. The capital could be for purposes such as starting a new business, managing seasonal cash flow, remodeling, relocating, expansion or entering new markets, market research or marketing costs, bringing on more employees, modernization, purchasing new technology or equipment, or new product development. Though debt is not always the right choice, used properly, it can facilitate or even be vital to, a business’s ability to get off the ground, adapt, or survive long-term. Banks are one of the main places where small businesses can go for money; and a good banker can be a helpful part of a small business’s support team.
Here are 8 tips for understanding small business banking relationships before going to a bank.
It is important to manage your personal finances well. When you apply for a loan, a bank will check your credit history. Banks take the view that how you manage your personal finances is an indication of how you will manage your business finances. If there are any issues with your personal finances, you may need to save more money, repair your personal credit or build your credit history before a bank is willing to work with you.
It is best to establish a relationship with a bank before you need money. When possible, if you can anticipate your needs and work with a bank beforehand to make a plan for financing, that will show that you are on top of things and managing your finances. Starting a business without thinking about what you will need for operating capital, or waiting until you have run up a lot of credit card debt and run out of cash, is not the best way to make a good first impression. If you wait until you are in a pinch, you won’t be in a good position to shop for the right bank with good terms and you may not even qualify for a bank loan.
You might need to meet with more than one bank before you find the right fit. Banks give loans because they make money on them. In the case of locally-owned banks, offering loans to local businesses is also a way to support their community, but that doesn’t mean that they will work with just anyone. When bankers connect with the right businesses, they are happy to develop a relationship with them. Different banks like to work with different types of businesses just as different business owners like to work with different bankers. You may need to meet with several banks before you find one with which there is the right fit in terms of your business and the type of businesses with which that bank works, the types of loan products that bank offers, the terms of the loan package, and the level of trust or comfort that you desire.
Banks are risk averse. Banks, these days, are highly regulated and are looking for safe investments. When they lend money to businesses, they want to feel assured that the loan is going to be repaid. One of the things that makes banks feel assured is that you have invested, or are going to invest, your own money in the business as well as whatever money you are borrowing. If you are viewed as too risky – e.g., because of your personal financial history, lack of equity, lack of collateral, your stage of business, the risks associated with your industry or with the purposes for which you seek money – you may need work with another source of capital either in addition to, or instead of, a bank.
Educate yourself about different types of financing. There are various types of loans and sometimes they are packaged together to fill a business’s various needs. Loans can range from lines of credit and short-term loans to long-term loans. Different lengths of repayment are appropriate for different purposes. For example, a line of credit might be useful for operating capital, a short-term loan for purchasing equipment, a medium-term loan for a large remodeling project, and a long-term loan for purchasing a building. In some situations, loan guarantee programs might come into play, e.g., SBA or USDA loans, to remove some of the risk to the bank and establish better terms for the borrower. Sometimes bank loans can be supplemented with gap financing through a local funding partner. (An example in some parts of Kansas would be an E-Community loan. Microloans through lenders such as Kansas Women’s Business Center are also sometimes an option.)
Don’t be intimidated, but do try to present yourself well and be prepared for your meetings. Know what the purpose of your meeting is and bring in whatever materials or documents the bank will need to work with you. If you having a preliminary get-to-know you meeting, be prepared with a description of your business and the purpose(s) for which you might be looking for a loan along with a list of questions that you would like to ask. Once you have chosen a bank and are ready to apply for a loan, know how much will you be asking for and for what purposes. Bring a well-developed business plan that includes realistic financial projections; and also bring the last several years of income tax returns (personal for start-ups, business for existing businesses). Show how you will be able to repay the loan and know what assets you have to collateralize the loan just in case. Ask whatever questions you have. Being prepared will help you make a good impression and, if you qualify, will also help speed up the loan application process.
Make sure that you understand the jargon, the repayment terms and the full-cost of the loan or loan package before signing any paperwork. (Here is dictionary of banking terms and jargon from the U.S. Department of the Treasury.) If there is something in the paperwork for your loan or loan package that you don’t understand, if the loan costs seem too high, the payments seem unmanageable, or if you are uncomfortable with the amount or type of collateral required, ask questions and explore whether there are better alternatives. You may need to keep doing your homework and investigate other options before moving ahead.
Once you have found the right bank or banker, stay in touch. If you have an open loan, your banker will appreciate a periodic check-in to help you both be assured that you are on the right track and to assess whether any changes need to be made. Remember that one of your goals is to anticipate your financial needs and to be prepared for them rather than be caught off-guard. Maintaining a good relationship can help solidify trust to help you in the future.
At the WU KSBDC, our advising services include helping clients with business planning. This includes assistance in producing financial projections, evaluating need for capital and identifying potential ways to access capital, so that our clients are well-prepared for their business’s future.
Laurie Pieper, Ph.D.
Washburn University KSBDC
America’s SBDC Kansas