Building Your Financial Credibility
(Part 1 of 2)
What you want from your bank...
what your bank wants from you
by Ranger Kidwell-Ross
Interview with Larry Hulvey, Vice President and Credit Administrator for Community Business Market; Andrew Niemer, Vice President, Community Business Center; and Gregory Foxx, Vice President/Manager, Minority and Women's Business Center, all of Bank of America.
WORLD SWEEPER: Let's start at the beginning. How should small business owners choose their bank and banker?
Hulvey: First off, it's very important for the small business person to recognize that this choice is one that is extremely important to the financial health of the business, perhaps just as important as a doctor is to the family's health. Therefore, it is important to 'shop' for a banker - to find one with business experience who has the time and interest in them and their company. It's equally critical, however, that they are comfortable talking with the person.
They will be sharing the most intimate details of their business - goals, direction, and business and personal financial health. They'll be sharing all of their business and personal tax returns, for example, and in return will want, and deserve, feedback that can be counted upon.
Foxx: Determining whether or not a person's banker is a good one for them involves a number of factors. First of all, is the banker experienced in the industry that the entrepreneur operates within? Does the banker understand the individual's operation? Will they take the time to get to know and understand the operator or the management of the company, what makes them tick, what the driving forces are behind them and their business?
Niemer: There aren't going to be many bankers around that have specific sweeping industry knowledge. If your readers shop around, however, they'll find a banker that they can get along with, one who understands business in general and who will also have the initiative to try to understand their particular business.
WORLD SWEEPER: Popular wisdom says that it's important to develop 'a relationship' with one's banker, but nowhere does it say what is meant by that. How does a person do this?
Niemer: Getting them to know you and your particular operation is the character side of the equation. Letting them understand what you do and how you do it. When you really need business advice, like help in putting together loan application packages or getting your numbers down, then go to your CPA or a business consultant.
WORLD SWEEPER: So the banker doesn't want to sit down and help you fill out paperwork, but they are willing to meet with you and talk a little bit about the business.
Hulvey: It is not prudent for a banker to help you fill out a loan application, when the information will then be used by their organization to make a decision. There are some potential legal issues involved if the banker fills out your application for you. That doesn't mean that you can't talk to them about various financing options, how to fill out a financial statement, etc. Your banker should become your financial advocate, and before they can do that they need to know the details of your business. It doesn't matter whether you are dealing with a small community bank or a large one, the actual lending decision will probably be made by someone else. By having a good strong relationship with your personal business banker, however, you should have someone who will be comfortable with supporting your loan request to the decision-makers.
Foxx: When we use the term 'personal banker,' we're speaking of the banker at the branch level, who may not be a commercial lender. The commercial lender handles the larger loans.
WORLD SWEEPER: Most of our readers already have their account open. What should they do to get that personal relationship rolling?
Niemer: If they don't know who their business banking representative is, they can find out the next time they go in to make a deposit. One way is to just go over and introduce themselves to the manager and ask who they should speak with. It also can help to get to know the banker as an individual, outside of the banking environment. For example, if you're involved in the Chamber of Commerce and you don't see your banker at meetings, maybe you could invite them.
Hulvey: I think that it's best if someone makes an appointment ahead of time. That's the way for them to know that they will get their banker's undivided attention.
WORLD SWEEPER: What about when that person gets transferred out, as seems to happen with regularity?
Hulvey: As with any business, there is a certain movement of personnel: the branch manager can change, your business banker can be promoted, etc. The history file of the business will stay at that location, however. So, even though you end up talking to a new individual, everything on file about your business history is still available. The previous banker's analysis of your firm, your entire banking history will all still be there. You won't be starting over from ground zero in that a very important part of your ongoing relationship with the bank is still there.
Niemer: If at all possible, business owners should make sure that their existing banker introduces them to his or her replacement. Then they should try to get to know the replacement and make sure that the new person really understands how the business of sweeping operates.
Foxx: Take the time to develop the same rapport that existed with the previous person. It's not a difficult task to do but it does take a little bit of effort on the banker's part, as well as the entrepreneur, to reestablish that rapport.
WORLD SWEEPER: In terms of the commercial lender: What most businesspeople do is find a branch-level banker that they like and then work with them. Are there any questions to ask up front to find out how liberal or conservative a particular bank is? How about presenting them with a 'what if' situation: For example, "What value would you give this asset of mine if I wanted to use it as collateral right now?" Might the answer help the business owner decide who to establish a relationship with? Otherwise an operator could find out too late that they're with the most conservative bank in the area, one that isn't granting loans or is using a highly restrictive loan policy compared to others. How can that pitfall be avoided?
Foxx: For small business transactions, most banks don't have any industry restrictions and have credit policies that are broad enough to not really be restrictive. As far as asking questions of a banker about loan policies, examples might be, "Is credit available? How much will you lend against my receivables? Is my equipment suitable for collateral purposes and is there a percentage that you'll lend against it? What type of equity would you like for me to have in my business?"
Niemer: You really can't get too specific [until you make a loan request], however, because there are a lot of little pieces that can sway things one way or the other. For example, if they want to buy a new sweeper, they might not have a preferred 30% down - maybe they've only got 15% down - but they may have other assets that are attachable, a longer history, good supporting outside net worth or strong excess cash flow that can offset weaknesses and help them get that credit.
When evaluating banks, the business owner should definitely not just look at a basic checking account and how they're going to get money. There are many other services, besides how deposits are handled, that are available even to the smallest of businesses. There are IRA's and KEOGH's, employee pension plans, payroll services, express tax services, and the list goes on and on.
As an example of a special service, I noticed an article in a past American Sweeper about somebody who was doing business in both New York and Pennsylvania. There's somebody who's probably getting big enough to have remote locations that are taking deposits, and they may well need multiple accounts. Banks can provide lock-box services in different areas that all go into one account. That way people can make deposits that all go into one account, in one bank, even though they're coming from different areas.
If the entrepreneur finds that he wants some special services, and his current bank doesn't provide them, he may end up going to another bank for them. It's generally not good for his banking relationship, however, to split up his accounts.
Hulvey: That it's easier for the company to keep track of its banking business is not the reason for them to stay with just one bank. More important is that the bank can keep in touch with the complete business. That keeps the comfort level higher on the bank's part, so it will be more inclined to respond favorably to a request for financing.
WORLD SWEEPER: Often the start-up business owner doesn't go to a bank for their first sweeper because they don't have a track record, and so it's too difficult to get money that way. They either take money out of savings or somebody in the family helps them out with a loan. Even if Uncle Bob puts up the money for their first sweeper, are there ways they can plan, once they get things rolling, so they will be able to work within an established lending facility from that point on?
Niemer: In the last American Sweeper you featured two articles on planning. In View From The Top, Mark Schwarze was talking about the competitors and the lowballers. Then there was one on Getting Profitable. Both of those articles -- I loved them, because you're telling the people we deal with, the smaller businesses, that planning is essential. They've got to sit down and understand their business - really figure it out. And the best way to do that is by putting together a good business plan. I can tell you that a banker really appreciates those small business loan requests where there's very good evidence that the business owner planned out what they wanted to do, and then has been achieving those goals successfully. That goes a long way toward making a banker comfortable with a request for a loan. You wouldn't believe the number of people that don't understand that fact!
WORLD SWEEPER: Everybody should, of course, have a business plan before they get together their initial money. If someone else put up the initial money, though, do you still want to see the early projections and then that they turned out to be realistic, if they did?
Foxx: Yes, we do like to see those results but it's much better if the entrepreneur brings the banker into the loop at the earliest stage, even when the [initial] planning is still taking place. It allows the banker to determine if the entrepreneur fully understands the planning process, and how he or she is going to go about implementing their plan. If the banker is a part of the planning process, it raises the banker's comfort level with the entrepreneur. Then, even though the initial capitalization or financing is provided by Uncle Bob, the banker can follow the progress as it's being made. Once the company's up and running and has been in operation for awhile, seeing those results actually taking place would heighten the banker's comfort level further still.
Niemer: You have two situations, though: startups and existing businesses. For a startup or a fairly new business, the business plan can be helpful to show the planning that has been done. But again, bankers rely most heavily on historical results. That's why new businesses are so difficult to finance. So, in a startup, the banker will rely an awful lot on the past experience of the management. A guy who was a great machinist for Boeing doesn't have much experience toward running his own sweeper business.
For a business that's been around, however, the banker is going to rely on actual historical results based upon tax returns or financial statements. Where the business plan would really come into play for the existing business is when that operator is trying to expand from, say, two to four or six trucks. That's a pretty rapid expansion all of a sudden. The banker will want to take a look at those projections, to see how well they've already done with the trucks they have. That history is what validates the projections for the future; seeing if the numbers support such rapid growth. People don't realize that such growth just eats up so much capital, especially if a sweeper operator is working for municipalities that might take 60 days to pay.
WORLD SWEEPER: Payment lag can also be a problem with some of the larger, nationally headquartered malls.
Hulvey: That's where a revolving line of credit can be a real lifesaver. It can cover the timing differences between when bills have to be paid and when receivables can actually be collected.
WORLD SWEEPER: Toward better planning, if somebody comes in with their business plan and says, "Here's what I anticipate doing so that I can get another sweeper in a year," might the banker look at it and give an analysis of whether it is a good, realistic plan?
Hulvey: Absolutely - if you have a good relationship with your branch banker. That's why it is so critical for the small business owner to look around before selecting their business banker. If the banker has the experience, wants to work with you and you are comfortable with them; then when you put together your business plan they will take the time and have the experience to be able to help you with advice and guidance.
Other sources of assistance include SCORE, the Service Corps of Retired Executives [a program of the Small Business Administration, call 1-800-827-5722 for pre-recorded information on all of the SBA's major programs and services], local Small Business Development Centers, business libraries and your CPA. There are a lot of places to go for help, but clearly your banker should be one of the first people you talk with.
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