Quick, what's your banker's name? When is her birthday? How many kids does he have?
If you're committed to the success of your business, you'll know that information. A friendly relationship with your banker is an important asset for your company--not only because capital is crucial for your success, but also because your business can benefit from free or low-cost services such as a line of credit with no collateral, checking accounts, safe-deposit boxes, credit cards, notary and other legal and paralegal services, no-fee payroll deposit (if you have employees), and even loans at preferred rates that often are granted on just a handshake.
How do you become more than a number to a bank? Once you've chosen a financial institution that provides the range and quality of services important to your business, make an appointment with the manager (if it's a branch or a smaller bank) or the officer in charge of your business account (if it's a major bank). At the meeting:
- Provide the officer with your business plan, brochures, business cards and anything else that will give him or her a feel for your business.
- Describe your business, financial situation and plans.
- Welcome any feedback and advice.
- Discuss what role the bank might play in your future.
- Ask about the scope of the bank's services.
- Broach the subject of consolidating both your business and personal accounts at that office.
- Express interest in your banker's background. Ask about his or her family, hobbies and aspirations.
Follow up with periodic phone calls, visits and lunches. Make sure that all your dealings with the bank are totally honest. Once your accounts have been established, keep your banker fully informed of your financial situation--whether good and bad. (Bankers hate surprises.) Be aware, too, that not all banks like small businesses. Choose one that does, even if it means banking in another community or another state.
Paul De Ceglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.
Face The Music
Question: We run a recording studio and are having real trouble paying our bills. Our customers are mostly local musicians and advertising agencies. What can we do?
Answer: No time for the blues. Take action. What are the causes of your cash shortfall? Are your expenses too high? Your customers slow- or no-pay? Your prices too low? Are your billing and collections disorganized? Did you buy cool, high-tech equipment that sits idle most of the time?
Compose a plan to fix your problems. The plan has four movements: generate revenue, reduce expenses, speed up incoming cash and slow down outgoing cash.
Some ideas: nonrefundable deposits to reserve studio time, payment in full before the product is given to the musicians, selling unneeded equipment, billing credit customers the day after their studio session, and looking for new services to offer to new customers.
Rank from high to low all your competitors' prices. Set your prices at the midpoint of the top one-third of this ranking. Raise prices in steps. Take bigger steps with those services that are priced furthest below the competition's.
Buy time for these changes to kick in. Ask your landlord to reduce or defer rent for a while. Can you convert some past-due bills to longer monthly payouts? Reduce every expense that won't harm the quality of your product. Who might lend or invest in your company or guarantee some creditor payments in exchange for recording services?
Eliminate surprises. Anticipate and act on problems with a rolling six-week cash flow projection. Make your cash flow break-even point your weekly goal. And don't hide from your creditors.
Make only promises you can keep and keep all the promises you make. It won't be pretty. Be prepared for abuse and threats. Keep your temper. Be positive and confident.
George M. Dawson (firstname.lastname@example.org) is a small-business consultant and author of Borrowing to Build Your Business: Getting Your Banker to Say "Yes" (Dearborn, $16.95, 800-621-9621). Send him your financing questions at email@example.com
ABC's Of LLC's
Thinking about forming a limited liability company (LLC)? This popular business structure protects your personal assets and offers flexibility--but you should look carefully before you make a move.
"[LLCs] combine the corporate advantages of limited liability with the partnership advantages of pass-through income, so earnings are treated like those in partnerships, sole proprietorships and most S corporations," says Brian Wiegand, president of Business Filings Inc. in Madison, Wisconsin. Income and losses pass through to the owners, who are taxed on their personal tax returns, as opposed to a corporation, where income is taxed twice--once on the corporation's returns and once on the owner's.
While an LLC lets you avoid double federal taxation, Wiegand warns, "Some states impose corporate income taxes on LLCs, so owners may have to pay personal as well as corporate [state] taxes."
Why the discrepancy? "This relatively new entity is in transition," explains Wiegand, whose 3-year-old firm sets up LLCs and S corporations for start-ups with fewer than 50 employees. "Rules and regulations are changing, so the future of LLCs is still uncertain."
If your state does impose double taxation, you may elect to have your LLC taxed as a corporation. Why? "To retain profits in the business, where they're taxed at the [lower] corporate--rather than personal--rate," Wiegand explains.
About 35 percent of Business Filings' clients form LLCs; most opt for flow-through treatment of earnings. As to liability, it's "generally limited to the amount of money each [owner] has invested in the LLC, not unlike a corporation's shareholders," he says.
Should you form an LLC or an S corporation? Wiegand recommends asking an attorney or accountant which entity would most benefit your business.
Know Thy Debtor
Do you know who your debtors are? Maybe not, says a veteran creditors' rights attorney. Many business owners fail to determine the legal identities of customers before extending credit, which can lead to uncollectible debts and even business failures.
Harold Stotland, partner in the law firm of Teller, Levit & Silvertrust PC in Chicago, acknowledges small businesses are getting better at checking out customers' creditworthiness, but says, "[They] often don't know if [the debtor's company is] a corporation, a partnership or a sole proprietorship. That means they're creating a debt and they don't know who the debtor is--who is legally obligated to pay that debt."
Proper documentation can rectify what Stotland calls "the biggest single violation of credit principles." He suggests using a form "that requires disclosure of the correct identity and composition of the legal debtor. That's the first principle of credit--determining who's responsible for paying the bill."
Beyond which, the partner in Chicago's oldest creditor's rights law firm points out, many businesses go on to make a second mistake: They fail to review the completed form to ensure it's been "filled out properly, if it's been signed, if the individual's official capacity has been stipulated and if all the information has been provided."
Why are businesses not more diligent? "They fear alienating customers," Stotland submits. "And that's a legitimate concern. Many customers may go elsewhere to avoid filling out lengthy forms. They look at the total package and question the cost of establishing credit with you--time, effort, interest charges. Credit and marketing go hand in hand. You must know what the market will bear in terms of credit demands and conditions. So keep forms simple, review them, and evaluate the cost of potential bad debts versus the cost of potential lost sales."
All things being equal, Stotland adds, "If the competition doesn't require customers to fill out detailed credit forms, they can open accounts more quickly and efficiently. That gives your competitors an advantage. But it's an advantage that may contribute to their eventual failure."
Business Filings Inc., (800) 981-7183, http://www.incorporating.com