Sooner or later your company will need business financing.
Whether you are in startup mode, an established business that needs funding to grow, or need money to survive a crisis, you will be approaching a lending institution with a financing proposal.
Finding business financing can be challenging in any economic climate, but can be especially so if you are a small business.
Many small business owners and entrepreneurs don’t know where to start the business financing process. Or worse wait until they are in a crisis to begin the process.
Your Best First Step
Start building banking relationships as soon as you can. That means today.
Bankers are phenomenal networkers. They can be found at all types of organizations: chambers of commerce, rotary, trade and industry oriented associations, as well as with many non-profit organizations. They attend the monthly luncheons and are speakers at many events.
These are great environments to meet and get to know the bankers in your community. Take advantage of these situations and introduce yourself. Sit next to them at events. Bankers are there to meet you and to answer any questions you have.
Many lending institutions offer educational programs and events. This is a great way for you to introduce yourself to the presenters, ask for their business cards, and set up a time to talk with them. Their job is to bring in new business, and in-person introductions are a great way to begin the relationship with a lender.
Most importantly, cultivate a relationship with lenders before you request a loan.
Electronic Relationships Just Don’t Cut It
The best and most convenient service offered by banks is electronic banking.
Today, you can get your clients to send payments automatically to your bank account; you can pay all your bills online without the hassle of getting stamps or going to the post office. And you will have an electronic record of when your money was deposited, the when and how much was paid on each bill.
Everything you need is now at your fingertips.
However, the convenience of electronic banking has made us strangers with the lenders in our communities. When was the last time you were even in your bank? Or do you bank at an institution that doesn’t even have brick-and-mortar establishments?
What this means is, that when you approach them, you are just a number on a spreadsheet. And, to you, lenders are just brands, not people.
Build a Personal Relationship with Lenders
Just as in any business, people like to do business with people they know and like. You need to answer these questions:
- Does your bank know who you are?
- Does your bank know what your business does?
- Does your bank know how important you and your business are to the community, including to their other clients?
The first step is to get to know the managers of several banks in your area. Meet and get to know the loan officers as well.
Also get to know the staffs too. You never know what influence each person has within the institution or what position she/he may have in the future.
If you don’t know any lenders then ask for introductions from your friends and colleagues. Don’t forget to ask your advisors—CPA, attorney, financial advisor—for introductions as well.
Your goal is to meet with a wide variety of lenders to determine which lender will offer you the best deal.
Make sure that you include community banks, which are the primary lenders to the small business community. Also, many credit unions also offer business financing, so don’t overlook them.
Make It Enjoyable
The best way to get to know bank managers and loan officers is to invite them to breakfast, lunch, golf, or to see your office and meet your staff.
As part of the “getting to know you” process, find out what lending authority they have, what types of financing tools they believe might be appropriate for your business, and what examples of financing they have provided to other similar companies.
Building a relationship can start with something as simple as setting up a checking account and a savings account. It is important to visit the bank often. For example, make your deposits in person and say hello to the manager.
When you are in the bank, let your contact(s) know how well your business is doing: after each new business win, announce to your contact at the financing source that you won a new contract or that you are making a big deposit.
Remember, the whole reason for doing this is to build a relationship with the management of the bank that you are going to approach in the future to get financing.
It is important to open accounts at the bank before you approach them with a proposal for getting some money. It is harder for a lender to say no to a customer than it is to say no to a stranger.
Shop for the Right Lender
Your job is to comparison shop. Meet with a number of lending institutions to find the one that is best for you.
Determine which lending institution would be the most helpful to you. It might be easier to get financing, a line of credit or a loan from a local community bank than from a big bank. In the U.S., community banks are the primary source of lending for small business, according to the FDIC. (See Where Do You Go When You Need Money to Grow Your Business)
Ask your colleagues, clients and vendors for referrals to lenders with which they have relationships. Coming in as a referral puts you in a whole different category that provides many advantages.
Also, it may be beneficial for you in winning additional business from your clients, or even obtaining pricing discounts from your vendors, if they learn that you plan to expand your business based on the additional funding you expect to gain.
When scouting out lending institutions, speak with the branch managers as well as the lending officers about their specific lending criteria. Request a copy of their List of Requirements; this will form the basis of your presentation to them.
Note that each institution will have specific requirements. Do not assume after talking to a couple of banks that all have the same needs.
At your meetings with lenders, find out about each bank’s customer service programs, as well as any special terms or incentives that they may offer. Some banks offer “specials” for companies in specific market segments, or within certain geographies, industries, or even the size of the business.
Part of their job description is to support small business, and they, just like you, are always looking for new clients. Banking is a business and, just like your business, they have targeted their ideal type of customer and designed a series of products to service that target audience.
Before you begin this process, it is helpful to have a list of questions ready for them to answer. These questions include:
- What types of businesses do they target?
- Does this bank finance startup companies? (If you are a startup)
- What is the minimum number of years of historical revenue, profitability, or cash flow data that the bank requires?
- What is the minimum amount of revenue, cash flow, or profitability that a business needs to generate to be considered for a loan?
- What is the minimum loan amount provided to clients ($100,000, $50,000, $25,000)?
- Does it require a minimum credit score (personal and business)?
- What are the minimum collateral requirements?
- Does it require personal guarantees?
- Do they provide equipment or working capital loans?
- What other requirements are there for a business applying for money?
- What are the requirements for obtaining a company credit card from that bank?
Ask each lender how they determine their underwriting requirements for your type of financing. Are there particular ratios that they focus upon? Each lender puts a different level of importance on specific financial metrics, so ask what is important to the lender.
Some banks expect you to establish checking and savings accounts with them. Some lenders require minimum levels of cash in each account, and may even require that the cash be kept in the account for a specific length of time prior to being provided a loan or for the length of the loan term.
Know what your lender expects before you apply for a loan or line of credit.
Obviously, the questions that you ask will be based on your particular situation, but it is imperative that you ask all the questions up front to make sure that you are approaching the most appropriate lender for your needs. Do not hesitate to switch to a lender that can better accommodate your lending circumstances.
Everything is negotiable—that includes interest rates and the terms of repayment. Work with your advisors, such as your CPA and attorney, to determine the best rates and terms that you can get.
Avoid submitting a request if there is a good chance that you are not going to be approved.
This is important, because lenders will find out that you were turned down when they run your credit report. If one lender identifies that your business was turned down for credit, a different lender may be more cautious (or less likely to approve) when reviewing your loan application, which is why it is important to choose the right lender for you.
Also, do not take a shotgun approach—sending your loan request to as many lenders as possible just to see if one bites.
Select the best lender that will give you the greatest opportunity to get financing for your business. Again, this is not a one-shot deal.
We are talking about building a long-term relationship with your potential lender. As your business grows, you will need additional financing in the future and will want multiple lenders competing for your business.
Diane Weklar, the Authority on Accelerating Business Growth, is the CEO of the Weklar Business Institute. She is the author of the award winning book, Mastering the Money Maze: 10 Secrets to Winning Business Financing,which is also an Amazon #1 Best Seller. This book provides practical insight to build a successful business and the practical steps to raise capital to help your firm grow. She can be reached at Diane@Weklar.com.