How To Be Your Banker‟s Best Friend
By Anne Rawland Gabriel Some business owners make it look easy. Whether it‟s a line of credit or an equipment loan, it seems they can get cash just by walking through their banker‟s door. What‟s their secret? They treat their banking relationship the way they would any other alliance – by understanding expectations and delivering the goods. “Before you can be a banker‟s best friend, you must figure out what you want out of the relationship,” says Andrew Swammi of Western Bank (www.western-bank.com) in Minneapolis. “Do you want a partner or do you want a vendor?” Partner vs. Vendor As a partner, your banker takes a hands-on approach by evaluating your business as a whole and suggesting financial mechanisms to get you where you want to go. As a vendor, your banker considers only the specific items you request, when you request them. “Get as much clarity as you can,” advises Swammi, VP of Commercial Banking. “Then, select a banker whose style matches your own. Next, find out what your banker wants to know about you and your business. Generally, this will include historical financial statements, current and forthcoming year forecasts and any marketing literature that describes your company. “Having a formal business plan is best,” Swammi asserts. “If you don‟t have one, there‟s lots of resources available to help you create one.” To assess whether your financial status makes the grade, obtain your banker‟s general underwriting standards. “No two banks are alike,” says Swammi. “Some require a dollar of equity for every four dollars of debt, others one for every six. Then there‟s profitability. Most banks will require positive numbers for two of the past three years.” In addition to being profitable, you must show adequate cash flow. “If you barely broke even for three straight years and made $10,000 the fourth that still may not be enough,” Swammi observes. “You must demonstrate sufficient cash flow to cover the debt you‟re requesting.” Collateral Expectations Not surprisingly, the amount you‟re eligible to borrow depends on your banker‟s definition of adequate collateral. “Banks all have what‟s called „advance rates,‟” explains Swammi. “Let‟s say your banker lends up to 75 percent of eligible receivables, 50 percent of inventory, 75 percent of equipment, etc. So, if you have $100,000 of receivables, a bank would be willing to finance up to $75,000.” Along with crunching numbers, your banker will consider one significant intangible: management ability. “For business financing, banks assess management expertise,” Swammi says. “For example, it makes a banker uneasy if they ask you „why is this product successful‟ and your response is „I don‟t really know.‟”
Therefore, anticipate inquiries suggests Swammi. “As you‟re putting together financial statements include some relevant narratives. Don‟t flood your banker with details, but do include reasonable background information.” Swammi also recommends consulting with your own CPA. “Talk to your accountant about how best to approach the bank,” he says. “And, when you meet with your banker, bring your CPA along to help you field questions effectively.” Getting an Answer Once you‟ve laid your cards on the table, you‟ll minimize delays by determining whether your banker is satisfied says Swammi. “Ask the question: „Now that I‟ve give you this, is there any other information you need from me to make a decision?‟” Follow this up by requesting a determination deadline. “Ask what‟s a reasonable time frame for giving you an answer and then hold them to it,” Swammi notes. “Be very specific, such as „next Friday,‟ not just „sometime next week.‟” Finally, remember that honesty is the best policy. “Above all, be candid,” stresses Swammi. “Every company has issues and your banker will find out about them during the review process. It‟s better to be up front because you can talk about how you‟re going to deal with those issues. And, as long as your plans are realistic, open communication improves the likelihood your financing will be approved.”