How Well Do You Know Your Banker?
Need to secure a loan or two to get started? Making the effort to develop a good relationship with your banker can pay off, as you'll learn by taking this quiz.
When you borrow on a credit card to finance a new business, you're giving yourself a line of credit. It isn't surprising that after seeing how much credit-card organizations are earning from such loans, many banks are jumping on the same bandwagon.
They're making unsecured small-business lines of credit a major source of loan revenue. "That's our No. 1 product," in the small-business division he heads, says Michael Price, a vice president of National City Bank in Cleveland, "We sell more small-business lines of credit by a factor of two-to-one." The typical size of National City's credit line to a fledgling company is less than $35,000 and the average term is about four years, he says.
At one time, the prospect of visiting the best bank to request a loan generated fear in the heart of struggling entrepreneurs. Now the process is less onerous. Banks are competing to serve this market, says Mr. Price, whose own employer has 300,000 small-business customers in six states. One reason is that entrepreneurs tend to be loyal to those who help them on the way up. Another is that they transfer personal accounts to the institutions that enable them to start their companies, he says.
"These customers can be very loyal," says Mr. Price, "and in the last few years, banks have liked making smaller loans to small businesses. Entrepreneurs are in the driver's seat, although I'm not sure they realize that."
Your relationship with your banker can have a great bearing on your ability to borrow money for your business. How well do you know your banker? Take this quizto learn how to be your banker's best customer.
What Banks Want to Know
While some entrepreneurs would likely think they're in the driver's seat, they can make the process of getting a loan easier by taking certain steps. The first is to be ready to answer these questions when you're preparing to meet a loan officer:
- How much money do you need?
- How long do you need it for?
- What are you going to do with it?
- When and how will you repay it?
- What will you do if you don't get the loan?
It's your job to be thoroughly prepared and to show the bank that lending to you is a low-risk proposition. Every banker has been burned at some point and doesn't want to re-experience that pain. Be prepared to address the banker's every doubt. A well-prepared borrower has a much better chance of being approved for a loan than a borrower who waltzes in without knowing the answers to these questions. A combination of information and preparation is the most powerful negotiating tool in the world.
"Working with banks takes an investment of time, a commitment and education," says Jeff Behrens, president of The Telluride Group Inc., a computer-services firm in Newton, Mass. "It's on the same scale of complexity as working with investors or employees or clients. It's a mistake if you don't get to know them."
Mr. Behrens has had several loans in the seven years since he incorporated his firm, including $50,000 to refinance credit-card debt he incurred early on and a $500,000 loan for an addition to the company's building. He now has $400,000 in term debt and a small line of credit. His 25-employee firm is profitable, generating $3 million in annual revenues.
Pledging Personal Assets
Many entrepreneurs are bothered when banks ask for personal assets as collateral for business loans, says Mr. Behrens. But they need to understand that banks require reassurance that the loans will be repaid. "The reality of forcing an entrepreneur to sell his home is pretty far-fetched, but they want to make sure you're in this 100%," he says.
The fact is, bankers aren't venture capitalists. They don't want to make high-risk loans regardless of the profit prospects of your business. Lending is the process whereby they let you use money and expect it to be paid back with interest. It isn't an equity process; there's no "upside." Even if your high-risk business becomes immensely profitable, all the banker gets is principal and interest. Bankers prefer to lend to low-risk, low-profit ventures than high-risk businesses with exciting profit prospects because they want their money back. Your banker earns a promotion by avoiding failure, not hitting a home run.
In the beginning, many entrepreneurs don't have much to show for themselves but their personal-credit histories. This will come under scrutiny. Even if your business is strong and healthy, if you had to sign personally for a loan six years ago, you may have to sign again.
"But I paid that loan off perfectly on schedule," you protest. "Doesn't that count for something?"
Most small-business borrowers repay loans conscientiously, so you don't distinguish yourself from the crowd by doing so. It's advisable to borrow and repay a loan when you don't need it, just to establish credibility.
"We want to know the income of the business and your personal income and how you will satisfy the business and your personal debt service," says Mr. Price. "So think about how you are going to package this information for the banker. They'll look at your character and credit history and if there's a hiccup there, you need to explain it."
Invite Them Over
During their first years of business, most entrepreneurs are too strapped for time to develop close relationships with a banker. They may be facing an immediate crisis when they seek their first financing. Naturally, under such circumstances, they don't know much about their banker, says Mr. Price.
But when you celebrate milestones in your company's growth--an anniversary of your founding, signing your 100th customer, an expansion or an important acquisition, "it's great for us to be invited," says Mr. Price. "We love to go to stuff like that, and it helps to get to know you personally." The more a banker knows about your company and how well it's doing, the easier it will be to get that second or third loan, he says.
Mr. Behrens says he meets with his banker every three months and invites him to company board and employee meetings. "I do things to strengthen the relationship," he says. "It doesn't happen automatically. It takes a little effort."
Take the accompanying quiz, then score yourself, to see how well you know your banker. In an era of e-mail and other hurried communications, you may be surprised by some of the questions. But remember, in banking, as in the rest of business, relationships are critical.
Copyright © 2004 Dow Jones & Company, Inc. All Rights Reserved
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