During my 25 years as a small-scale natural products retailer, I have often needed to borrow money. Five years ago, Family Nutrition Center borrowed bank funds to open a second store. Last year, we financed a bank loan to consolidate our short-term debt and thereby improve cash flow. Both loans were possible because our bank knows all about us. It knows our business, as well as our credit and account history.
Don't wait until you need money to establish a banking relationship. Find a bank that has an interest in small business. If you want the bank to understand your needs, be ready to understand its needs first. Bankers are impressed when you come to them prepared. They especially want to know that you understand your financial numbers.
The easiest way to understand what your bank is looking for is to ask. I asked my banker to review our financial statements and explain to me what was important to the bank. In other words, I was asking her, "How does my business measure up? How can I improve my business from a banking perspective?" Knowing these criteria, you can then make adjustments that lower the risk to the bank and improve your business at the same time. And don't neglect to review your personal finances, because they will undoubtedly be a factor.
Have you ever been frustrated with your bank? Been turned down for a loan? Do you wonder why banks make it so hard to borrow? It's really very simple. If you have had difficulties getting financing from a bank, it is most likely because you are a risk. Most banks are not in the business of loaning money to high-risk ventures. Banks are in the business of helping finance the growth of solid businesses. You will be much more successful in your search for financing when you conform your business to commonly accepted financial principles.
When you want to borrow money to finance some aspect of your business, there are five factors banks consider: (1) location, (2) cash flow, (3) collateral, (4) credit bureau scores and (5) leverage. These five criteria will help the bank answer their most fundamental question, "Will you be able to pay back the loan?"
- Location—Is your business in a desirable location?
- Cash Flow—Does your business generate enough cash flow to make its monthly payments?
- Collateral—In a worst-case scenario, are there assets that can be liquidated to pay back the loan?
- Credit Bureau Score—What does your credit bureau reveal about how well you have managed your financial obligations?
- Leverage—Do you have excess debt?
These areas are objective measurements the bank will use to determine their level of risk in granting you a loan. If your loan package is deficient in one or more of these areas, bank financing will be more difficult to obtain. You should learn and use these same measurements as one way to benchmark the health of your business.
There are several other aspects of your business that are critically important to a successful banking relationship. Ask yourself the following questions to assure that you are maintaining the highest standards of financial management.
Are You Credible?
A bank needs to know that it can rely on what you tell them. If you are not able to be honest about your finances with your bank, then your business is in trouble and you need to seek financial guidance.
Are Your Numbers Honest?
Let's be frank: Banks can be skeptical of small businesses because some owners skim money out of their businesses to reduce taxes. Skimming money out of your business makes it appear less profitable than it is. It also appears that you have less personal income. Therefore, both you and your business appear to have lower incomes, and the business may therefore be a higher risk.
I decided many years ago, when I was tempted to skim money from my business, I would simply pay the taxes as a "cost of doing business." Instead of skimming, I determined to focus on growing my business. As a result, I knew that a bank, an accountant, the IRS and future potential buyers could look at my business and there would be no question about the reliability of our numbers. This commitment to honest and accurate financial accounting is one of the critical foundational elements of a successful business.
Are Your Numbers Current?
Banks need to know how your business is doing. They cannot know this if your accounting is months behind. You need to be as current as possible. If your accounting is lagging, it is clear that you are not using your financial numbers to manage your business.
Do You Understand Financial Statements?
Many small-business owners do not fully understand financial statements and their role in financial decisions. If you don't understand financial statements—and why they're important—ask your banker or accountant to explain them. Or, expand your knowledge by taking a class in accounting and finance for small business.
Do You Pay Your Bills On Time?
Banks want to know that you manage money well and that you take your credit obligations seriously. If you have a poor credit history, a bank can help you improve it. But it is much better for you, and the bank, if you have handled your finances, both business and personal, in a responsible manner.
Evaluate Your Business
How well does your business stack up? If you have done the above, then you will find banks receptive and willing to help you. After all, they are in the business of loaning money to responsible customers. Nurture and value your relationship with your bank, as you do your other business relationships. The success of your business may someday depend on it.
Steve Lankford is the president of two Family Nutrition Centers in Green Bay, Wis. Established in 1976, FNC was recently voted one of the top-100 health food stores in America by a trade magazine. He can be reached at 920.430.9559.
Natural Foods Merchandiser volume XXII/number 11/p. 14-15