Growing up in a small business family, our company’s relationship with the banker was sometimes a topic of dinner table conversation. I was working in the business at the time and experienced first hand the love-hate relationship the family business had with our banker. Over the years I’ve had those same kinds of relationships with a business banker or two of my own. Some have been great partners who helped those businesses grow—others were not.
This morning as I was trying to catch up on my business reading I stumbled upon these four tips on Inc.com that I think bear repeating. Securing funds needed to fuel growth or working capital is one of the biggest challenges small business owners live with every day. If you’re in high-tech and have the next Facebook or Salesforce.com, venture capital could be an option, unfortunately for most Main Street businesses, that just isn’t an option.
If your experience has been like mine, those times when you really need cash are the times the bankers are less than willing to help. Here are four tips that just might help you better manage your banker:
- Perform your own stress test: “Read the fine print on your loan covenants, and then imagine worst-case scenarios,” says Burt Helm. There have been many small businesses over the last few years who turned to their banker when things got tough and they needed extra cash—the bank just said ‘No.” If your business revenues drop, real estate values plummet, or you get hit with a lawsuit, don’t expect your banker to stand by you. Helm suggests you, “Assume the bank will play hardball.” I agree. Although the success or failure of your business is personal to you, it’s not that way for the bank. Your banker will want to know your plans should revenue plummet, etc. If you’re regularly asking yourself those tough questions, you’ll be better prepared when your banker asks—and more likely to get help if you have a thoughtful plan.
- Spread the risk: Putting all your eggs into one basket is never a good idea. Helm suggests that relying on a single line of credit could be very risky if for some reason the bank decides to call your loan. This happened to the family business a few years back and made for some real scrambling to keep things going. I wasn’t working there at the time, but if your banker gets nervous about something you are or are not doing, he or she is going to want to reduce their risk as quickly as they can—that often means cutting off your credit line. Having a good relationship with your banker is a good idea, but there are other options outside of a traditional banking relationship to help small business owners acquire the financing they need. The challenge is knowing where to look and how to get connected with the right financing for your business. Although this might sound a little self serving, Lendio matches thousands of borrowers every year to the best financing options for their individual situations.
- Be too big to fail: “Consider a community bank,” argues Helm. “If you’re a more important customer for them, they will be more likely to work with you if business goes south.” This sounds like an obvious solution, but being a big fish in a small pond has its own drawbacks. As your business grows, your financing needs will grow too. You’ll want to make sure your Community Banker will be able to scale the services you’ll need. What’s more, you’ll still want to avoid keeping all your business financing needs under one roof (see #2)
- Stick with what fits: “If you plan to use a piece of equipment for five years, get a five-year loan,” he says. “The smaller payments of longer-term debt may be tempting, but you never want to be making payments on something you no longer use.” I’ve personally experienced the grief of making payments on equipment that had long outlived it’s usefulness. Having made that mistake myself, I agree with Helm. You never want to be making payments for something that is no longer useful—no matter how attractive the terms might have felt at the time.
Several years ago some colleagues and I went in on the purchase of a photography supply business. Our banker, Steve, fast became a real partner in our success. He understood our business, he regularly visited our store (in fact, I don’t think I ever stepped into his bank during those years), and helped us with lines of credit, credit cards, and whatever else we needed to do business. Without question, we all trusted Steve and could turn to him when we needed advice or help regarding our need for financing. Unfortunately, not all of the bankers I’ve worked with over the years have been as helpful.
Far too many small business owners fail to manage their relationship with their bank and their banker—what are you doing to manage yours?
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business best practices, tips and advice accessible by weaving personal experiences, historical references and other anecdotes into relevant discussions about leading people, managing a business and what it takes to be successful for Lendio. Ty also shares his passion for small business every week on Forbes.
You live in la-la land Ty. In todays banking world relationships do not have the impact they used to especially in small community banks where the regulators have them afraid of thier own shadows. They are pulling back credit lines to shore up thier borrowing base, reducing exposure and living off of fees. I have been in business 30 years and at the same community bank for 13 years. I am a good business….infact very good, profitable, strong, with a 5-1 and they have one answer to my requests…..NO.My own bank CEO and CFO told me it was the most hostile banking enviorment that they had operated in thier lifetimes. Manage your banker …….try herding some cats it will be easier.
Mitch, I think we’re on the same page. Most of the decisions bankers make today are strictly based on credit scores and risk appraisals. My advice will hopefully help those who are going into their bank prepare for some of the questions they’ll be asked and armed with the type of answers that their banker might want to hear.
What’s more, I wouldn’t rely exclusively on your local bank to acquire the financing you need. There are a number of alternative lending sources that might be considered non-traditional, but provide a lot of Main Street business owners the funds they need to operate and grow. That being said, ignoring your relationship with your local banker because you don’t think it matters isn’t a good idea.
Thanks for your comments and for reading.
Ty, as usual, I think you are sharing some excellent lending advice with small business owners. The only thing I would add is that I think these points can be applied to nearly any lending relationship, not just those with banks. And as banks continue to turn away small businesses, it’s important for business owners to know that there are dozens of different alternative lending options out there. And many of them are customizable to individual business needs – a few of which are aptly described above.
Just read the article and the comment below. I don’t think all community banks are the same. I had one for years and when I needed something from them instead of just using and paying for their services they were really playing hardball. But I looked around at some other banks and found a great one. I have become very friendly with their account manager and got her to join the same networking group I’m in. We really help one another out. The networking group has brought the bank many new accounts and they just ben over backwards for me and I know I’m not one of their “big” accounts.
Thanks for contributing Cynthia. I have to admit, it’s encouraging to hear that there are still bankers out there like that.