In the business world there are many avenues to secure financing, and right now money is flowing abundantly. Everyone wants your business, and they’ll fight for the right to hold your money. Banking is a commodity; a truth told by many business bankers we partner with, so what happens when you need a bank for something other than your checking account?
Here’s my three-part guide on finding money, “pre-banking” yourself, and shopping for a banking relationship that will set your company up for success in 2020 and beyond.
A little bit about banks; banks are typically conservative and risk averse. In layman’s terms, a bank doesn’t want to lend money to you unless they feel really good about being repaid. In lending, the top three items scored are ability, stability, and willingness to repay the debt. A banker is going to make sure they are protecting the assets of the bank when talking to you about needing a loan, and a really good banker will try to build a lasting banking relationship that goes beyond just a loan or checking account (we’ll discuss more later) that will ensure long term each of these factors. Here are your tools to ensure you understand these conversations, and why they may say “no” now, but it doesn’t mean “no” forever.
There are three different types of business modes with differing needs which I want to discuss in this series:
Banking as a Startup Business
A startup is defined as a company in pre or post seed stage, typically up to two years old since inception. Guess who doesn’t want to meet you in your first two years of inception to talk about a loan? A banker.
What will they talk to you about now?
- Opening deposit relationships
- Establishing a merchant account
- Payroll services
- Establish a business credit card
This is where a really good relationship should start with a business banker. Notice, I say business banker. Most small business owners walk into their local branch and say, “I own a business, I’d like to open up a business checking account”. DON’T DO THIS.
Why? Because a business banker will visit you at your place of business, have coffee or lunch to discuss business growth periodically, and will fit the right accounts with your precise place in your business’ growth periods. All respect to the branch manager, but they are also responsible for managing a branch, his/her employees, people coming in the branch for their personal accounts, and trying to keep up with regulations which impact them day to day in their branch. There are some exceptions, but to be set up for success as your business builds, ask for a meeting with a business banker. Additionally, a business banker has lending authority above that of a branch manager- for when you’re ready for money- and they’ll refer you to a business banker, anyway.
Business vs. Personal Credit
They are different, and here’s how- your personal credit is based on your FICO score, and established over years of personal credit history with your mortgage, cars, credit cards, student loans, etc. Your business credit history is established by your company after years of revenue, solid EBITDA (earnings before interest, taxes, depreciation, and amortization), and several profitability ratios (again, ability, stability, willingness).
Often, you’ll have to personally guarantee your business, meaning your personal credit will come into play. Yeah, you still will be on the hook for your business debts if you fail.
What if you need a line of credit to get started? Pretty much forget about it. They need two years of financials, minimum, demonstrating that you can make money, pay your bills, and have experienced some solid profit.
This is where folks get into trouble- because there’s always a guy who will lend to you. Don’t fall into the trap of going to a creative lender just yet (if you’re thinking about it, call me right away). Your banker could help with is to connect you with a private investor, money in the equity of your home, or retirement accounts which they can use to help manage your startup expenses.
After your first two years in business, you will have developed a relationship with your banker which should lead to a deeper one- when you’re in growth mode.
So, what should you look for in a business banking relationship?
- Someone who can relate to your industry or has direct experience with your industry. I would go as far as seeking specifically an individual that has experience- say you own a flower shop, find a banker who knows about flowers, operating a flower shop, or who knows someone in or has connections the flower business.
- Someone who has worked for more than one bank. This is my opinion, but I know a lot of people in banking who, because they understand their competition directly, can offer advice regarding lending practices of their bank more clearly.
- An individual who has connections beyond the bank. You want a banker who is networked; for when you are ready to grow, they can be an advisor ready to help find a new building, insurance, or whatever else you might need in your business.
- A banker who doesn’t necessarily work on commission and is not incented on number of applications submitted.
If you are a startup business, or within your first two years of business, you need a banking relationship you can trust. Your banker is on your “board” along with your accountant, insurance broker, and attorney. We recommend interviewing three different banks, learning their processes, and comparing each side by side. We can certainly provide guidance and quality referrals and hope that you take seriously the relationship you make with your business banker. He/She is paid to help you succeed.