The how, why, and who of establishing and building banking relationships to successfully obtain sizable business loans and credit lines. Also discusses what actions to take to speed up the process.
Build and nurture a relationship with your banker. You want a true banker – someone who has decision-making authority…typically someone who has signature authority for $500,000 or above. Cultivating a relationship with a good banker is well worth the effort. If kept informed, that banker will support you when your margins drop, point you to other financing sources if he or she cannot directly assist, and seek creative solutions if your loan needs exceeds the limits for the bank. Because of this, follow the banker. If your banker leaves, follow your banker to his or her next bank. A great banker is prized wherever he or she goes so your banker will act the same no matter what institution he or she is at. If the banker leaves and you stay with the bank, you may no longer have anyone supporting you.
Business owners must establish relationships with their banks as soon as possible. If you anticipate needing financing six months hence, go in and meet the branch manager and ask for an introduction to a vice president or assistant vice president or that bank’s equivalent. Most large retail bank branch managers only have signature authority up to $50,000. If you are anything but the smallest of start-ups, this approval level will do little beyond providing initial working capital which a $500,000 per year business will quickly run through. Some community bank branch managers have greater signature authority up to $100,000 or even $250,000. Many bank vice presidents have signature authority up to $500,000.
“Signature authority” refers to the maximum loan amount which the person can approve on his or her own, without presenting a case to his or her superiors to get the deal approved. The more approval steps the loan must go through, the greater the likelihood the loan will be rejected. The better and closer the relationship with decision makers at the bank, the greater the likelihood the loan will be approved. In addition, increases or extensions will be approved even when the company encounters short-term difficulty because the banker will believe in his or her client and will be an internal champion for the client.
The first bank most small companies should pursue is their local community bank. These banks believe strongly in relationships. Sometimes their lending caps are low for companies that are growing exponentially (i.e., a community bank may only lend up to $10 Million), but these entities are often quite loyal and will do what they can to assist in the procurement of sufficient funding beyond their bank limits including making introductions or referrals to other banks. Thus, these relationships are invaluable.
Business owners can cultivate these relationships by obtaining a referral or cold-calling then visiting his or her bank. Bankers are members of the community. In smaller communities, they are often very active community members. Therefore, to meet bankers consider joining the local chamber of commerce or Rotary Club, getting to know members of your church congregation, or taking an active role in professional, business, or non-profit organizations. Essentially, company owners must network to identify and get to know the bankers.
Finally, to be prepared to leverage the relationships to obtain bank financing, you must have proper documentation available. These include the following:
1. Corporate tax returns for the past 3 years.
2. Personal tax returns for the past 3 years.
3. Financial statements for the past 3 years, prepared by a CPA.
4. Abbreviated business plan or Executive Summary
5. Pro-forma* financials for the next 3 years.
6. Explanation of any negative business items (drop in revenue, loss, negative cash flow, or similar)
7. Aged receivables, especially if seeking any type of working capital financing.
Financials audited by a CPA are best. Reviewed financials are next. If you have audited financials, you do not need to provide corporate tax returns. If your business has sufficient reserves and has been in business for five or more years or has a number of investors, you may not need to supply personal financials. However, if a personal guarantee is required, the bank will most likely want copies of the financials for the person guaranteeing the loan.
Note: Pro-forma is a nice name for projected future performance. Aged receivables refer to the amount of time it takes to collect on the accounts receivables. You generate account receivables whenever you send invoices to your customers. Do you collect in 10-15 days or does it typically take 80-90 days for your customers to pay you once they receive the invoice.
