Category Archives: Banking

How to get a bank loan – Part Two

Since most businesses have been deleveraging post-2008 financial crisis, you could be forgiven for getting rusty at how to ask for a loan from bank. But as the economy picks up and you need growth capital, it’ll be handy to brush up on your banking skills.

Last time, I used the customer qualifying process as an analogy for how to work with your banker to get a loan, and offered the first three of six loan request factors: Who makes the decision, what do they need and how do they want it? Now let’s talk about the last three.

What motivates them?

All banks need to make loans, but all banks don’t like the same kinds of loans. Some banks make working capital loans, and some don’t. Most banks make real estate loans, but each one has its own profile of what kind of real estate they like. And all banks like to loan money for things with serial numbers, like vehicles and equipment. In your first meeting, what the banker says about your proposal should indicate their level of interest in your type of loan. But if not, it’s okay to ask.

Banks will fight for loans, but they’ll kill for deposits. Checking account deposits are virtually free money to a bank, a portion of which they use to make loans. They like personal checking accounts, but LOVE business accounts. A bank’s motivation increases with your daily deposits if you place your operating account with them. You should know the value of your deposits to a bank and use that information to negotiate rates and terms.

How motivated are they?

You can tell how motivated a bank is by how helpful the loan officer is.  Her excitement is no foreteller of success, just of motivation.  But if she seems indifferent or unmotivated, that’s probably not a good sign.

A deal that couldn’t get through the front door of Bank A this morning, could be received with a red carpet at Bank B this afternoon. So be prepared to take your proposal to more than one bank. And be sure at least one of the banks you make a loan proposal to is an independent community bank.

What do I have to do?

Bankers love field trips. Give your banker a demonstration of the new equipment the loan is for, or take them to see the real estate you want to buy. Show them how the object of your loan request will help you grow your business, profits and deposits.

The best way to get a business loan is to do your homework, anticipate what your banker needs and get them what they ask for. And if the bank that was loyal to you when you needed them doesn’t have the best deal — but it’s a deal you can live with, “dance with the one that brung ya.”

Write this on a rock …

Understanding how banks make business loans will improve your chances of getting one.

Jim Blasingame is the award-winning host of The Small Business Advocate Show and author of “Three Minutes to Success.” Find Jim online at www.jbsba.com.

 

How to get a bank loan: Part One

One of the markers of this post-recession, so-called recovery has been the practice of deleveraging. Across the economy, from consumers to businesses large and small, debt has become something to get rid of.

Out here on Main Street, this trend has manifested in a dramatic drop in bank borrowing by small firms. Indeed, for more than a half decade, survey after survey has shown that less than 5% of business owners report their borrowing requirements have not been met, while the majority say emphatically they don’t want or need a loan. Consequently, there’s a pretty good chance your business hasn’t made a loan request to a bank in a while.

But the economy will eventually kick into an expansion phase, and what has become no less than a de facto moratorium on borrowing won’t last forever. And since most small business growth capital comes from bank loans, even for well-capitalized firms, it’s always good to revisit a few banking relationship fundamentals.

But don’t worry. If you’ve never asked a banker for a loan, or if it’s been a while, getting a bank loan is a lot like the process of qualifying a prospective customer. For example, you want to know these three things:

1. Who decides?
You have the right to ask who is going to make the decision on your loan. Can your loan officer decide, or will it go to the local loan committee or somewhere else? Why do you care? The more people involved in the loan approval process increases the scrutiny of your deal, which means more questions and more time for you to budget from proposal to answer.
2. What do they need?
Your banker will ask for personal and business financial information. They might accept last year’s business numbers, but they could also ask for an interim report. Depending on the size of your request and what you’re using the money for, they may ask for a business plan. If the loan is for real estate, a current appraisal will be required.

Don’t give the bank more than they ask for, but give them everything they ask for. Remember, the quicker your banker gets the information, the quicker you’ll get an answer.

3. How do they want it?
Ask your banker what information can be presented verbally and what needs to be in writing, whether hard copy or electronic. Whether you’re borrowing $5000 for a computer, or $5 million to buy out a competitor, knowing as much as you can about the loan approval process will significantly improve your chances of not only getting a quick answer, but a yes.
Next time, Part Two: What motivates your banker.

Write this on a rock … Qualify a bank like you do customers, and be sure to do your homework.

The Blasingame Translator for Small Businesses and Banks

Once upon a time, a storm caused two ships to sink in the same area. All on board were lost at sea, save one from each ship, and those poor souls were alive only because they swam to a small island nearby.

As luck would have it, the two men hauled themselves up on the beach at the same time and within sight of each other. But survivor’s elation soon became pensive as they realized that each spoke a language unknown to the other.

Immediately both men had the same unspoken thought, “I don’t know this man or the language he speaks, but if we’re going to survive, we have to find a way to communicate and work together.”

In many ways, this tale actually plays out every day. But instead of on the high seas, our story takes place in the marketplace. And instead of mythical shipwreck survivors, our real life players are small business owners and bankers.

Female banker sat with investor

Like the survivors in the first story, the excitement of the latter-day castaways about their future prospects turns pensive when they both realize that: 1) they need each other in order to be successful; and 2) they don’t speak each other’s language very well, if at all.

With so much common interest and so little mutual understanding, can these two create a successful survival story?  Absolutely, but only if they have The Blasingame Official Translator for Bankers & Small Business Owners. Here are a few examples of how The Blasingame Translator works.

For small businesses to understand banker, they must:

  1.  Identify their banker as a success partner and their business’ best friend.
  2. Stay close to their banker when things are going well, and even closer when things aren’t going so well.
  3. Believe that an uninformed banker is a scared banker, and a scared banker cannot, and will not, behave like a partner.
  4. Pay attention to what motivates and impresses a banker, like attention to detail.
  5. Understand pertinent bank rules and regulations, so you don’t ask for something that can’t be done.
  6. Reward banker loyalty with small business loyalty.

For bankers to speak small business, they must:

  1.  Understand Blasingame’s 1st Law of Small Business: Starting a small business is easy, operating a successful one is not.
  2. Understand Blasingame’s 2nd Law of Small Business: It’s redundant to say, “undercapitalized small business.”
  3. Understand Blasingame’s 3rd Law of Small Business: A small business is not a little big business.
  4. Explain bank rules and regulations, and recommend services and products.
  5. In the credit scoring process, always find a way to give small business owners credit for character, past performance and best efforts.
  6. Reward small business loyalty with banker loyalty.

Write this on a rock … To avoid becoming marketplace castaways, small business owners and bankers must speak each other’s language.

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”

Does your business use lights or gauges?

Trick question: If your business were a car, would the dashboard have warning lights or gauges? The correct answer is gauges because they provide incremental information, while a light is either on or off.

Business gauges are financial statements, numbers and ratios that anticipate attention; warning lights often don’t reveal a problem until it’s too late.

Let’s take a look at these two different dashboards addressing the same three issues:

Inventory warning light: Check Inventory!

This light flashes when you’re out of stock. Oh, you’ve got plenty of inventory, but it’s poorly distributed across lines and you don’t have what customers want now.

Inventory gauge:  This is your balance sheet, which helps you see inventory creeping up in any month so you can immediately check stocking levels to get them back in line.

Inventory is cash you can’t spend until a customer pays for it. Can your cash flow wait for a light to flash before you make inventory adjustments?

Payroll caution light: High payroll!

A payroll light only comes on when this expense is already too high. By then you may have made hiring and compensation commitments you can’t justify.

Payroll gauge:  The needle on the payroll gauge identifies the payroll-to-sales ratio including a breakdown of how much you should pay sales, management, production, etc.

Payroll is likely your largest operating expense. Do you want to wait for a light to flash or manage it with the incremental movement of a needle?

Growth danger light: Excessive speed!

This light blinks when your working capital engine has reached redline operating levels. By that time, either your internal systems are over extended, you will have grown yourself out of business, or both.

Growth gauge: Certain financial ratios and a cash flow projection are the growth gauges that indicate if you have the working capital to expand or if you should slow down until you’ve acquired the capital to grow successfully.

With sustainable success depending on sound growth decisions, you need the incremental immediacy of a gauge, not the vagueness of a blinking light.

Business gauges are the numbers on your financial statements and the ratios they produce. Like gauges on a car’s instrument panel, when displayed accurately and checked regularly, they move in small increments to show positive trends or alert you to a specific dangerous direction.

Astute business operators not only manage the movement of their operating gauges but also understand the cause-and-effect relationship each gauge has with another.

Write this on a rock …

Businesses that survive long-term have gauges on their dashboard, not warning lights.

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”

Is a crowdfunding business loan right for you?

In my last column I introduced the concept of crowdfunding — the new word and online methods of fundraising and capitalization. The two crowdfunding examples I described were contributions and business transactions doubling as fundraising.

Let’s continue with the third type, which is, crowdfunding structured for loans.

Crowdfunding debt, AKA peer-to-peer and social lending, is like traditional borrowing: a request for funds comes with the promise of repayment with interest over a specific term. But the former is done online, and the latter is not. Individuals use crowdfunding for personal loans, but our focus here is for business borrowing, which typically involve four crowds:

1. Business borrowers

2. An online crowdfunding platform aggregating loan requests

3. A funding and underwriting source, likely a hedge fund

4. Individuals who invest with #3, knowing it’s for loans to small businesses

Remember the innumerable and anonymous crowdfunding factors from the previous column? These two are also in play with crowdfunding debt, because a large crowd is required to provide a pool of loan funds and dilute the risk, and investors are only known to the funding source aggregator.

Regardless of the funding source, crowdfunding or traditional, small business loans are expensive for the borrower because this sector is considered high risk for two primary reasons:

1. Most small businesses are undercapitalized and operate on a thin survival margin

2. Too many small business owners don’t track financial performance well enough to know how they’re really doing.

And since crowdfunding loans are unsecured, taking the risk to an even higher level, crowdfunding business loans are doubly expensive.

So is a crowdfunding business loan right for you? Here’s some context: If you can borrow from your bank, this year you’ll probably pay an average of about 6% annual interest rate. A crowdfunding loan APR will likely be 15% or more. Any questions?

Crowdfunding business lending has achieved some level of critical mass and is growing.  As I’ve said before, the future of small business capitalization will look a lot different than it does today largely due to this emerging alternative.

Next time we’ll wrap up this series with a tour of the good, bad, and improbable of investor equity crowdfunding. And more tough love.

Write this on a rock If you can borrow money from a bank, don’t borrow from a crowd

Jim Blasingame is the author of the award-winning book, “The Age of the Customer: Prepare for the Moment of Relevance.”

 

Plan for success while operating for survival

Blasingame’s 2nd Law of Small Business states: It’s redundant to say “under-capitalized small business.”

Growing small businesses operate in the narrow danger zone between the leading edge and the bleeding edge of the marketplace. And since our capital reserves and options are limited, every small business CEO makes decisions every day that are at once as much about survival as success.

CashIsKing

Photo courtesy of KSU

Here are four “operate for survival” things to do that will serve you well this year, followed by four “plan for success” ideas.

  1. Cash used to be King, today it’s the Emperor. Ask employees to find and cut waste. Get them involved in reviewing operational processes and eliminate or tighten up inefficient ones. What’s their motivation? How about job security? Watch the pennies and the dollars will take care of themselves.
  2. Stay close to accounts receivables and cash management. Many tasks can and should be delegated, but in a small business, whether you’re growing or just holding on, cash management is not one of them.
  3. Declare war on excess inventory. Inventory is cash you can’t spend until a customer pays for it. Practice Just-In-Time (JIT) inventory management, not just-in-case.
  4. Stay close to customers. This isn’t complicated: Ask customers what they want and then give it to them. We’re in the Age of the Customer – know your customers’ expectations.

Since opportunities will present themselves over the next year, here are four “plan for success” thoughts to consider as you take risks:

  1. Eyes wide open. The marketplace we’re entering is going to look different than last year. That means opportunities – and threats – will look different, too.
  2. Measure twice, cut once. Before taking a big growth step, apply the carpenter’s rule. Don’t scrimp on due diligence: check your assumptions, recheck your assumptions and then proceed with the best information you have, which might tell you to stop.
  3. Mistakes are expensive. Can your capital picture support inevitable mistakes and/or surprises? Remember, there is a very fine line separating opportunity at the leading edge and the cash-eating bleeding edge.
  4. Make your banker your partner. Keep him or her informed whether the news is good or bad – especially the bad. Remember this: An uninformed banker is a scared banker and no one ever got any help out of a scared banker.

Write this on a rock –Successful small business CEOs operate for survival while planning for success.

 

The Blasingame Small Business Banking Rule of Thumb

For many years, I’ve made recommendations to small businesses with regard to their banking relationships called: The Blasingame Small Business Banking Rules-of-Thumb:

Photo courtesy of Notes From A Chair Blog

Photo courtesy of Notes From A Chair Blog

1st Blasingame Small Business Banking Rule-of-Thumb
A small business should have at least two banking relationships. If you’re turned down for a loan at one bank, you have another place to go where the person already knows about you and your business. One primary reason for this rule is because if only one banker knows you and your story, when he or she gets fired, promoted or otherwise leaves the bank, Murphy’s Law will dictate that it will happen when you most need a favorable banker.

2nd Blasingame Small Business Banking Rule-of-Thumb
At least one of the banking relationships should be with an independent community bank – that means locally owned and managed – and preferably your lead bank. I’m not picking on big banks, it’s just that most small businesses need to be given a little extra consideration for their character and past performance, which is typically not as forthcoming in a large bank.

Loan decisions made by large banks have two elements that may not give a small business this extra consideration:

1) The actual decision is made by a loan committee in another city, by people who probably don’t know the business owners

2) They rely heavily on what is called “credit scoring,” which is a computer program – each bank has its own proprietary model – that receives quantifiable information and produces a numerical “score”. If this week the bank has decided only scores of 18 or more are accepted, a loan request under 18 will likely be rejected. I’ve never heard of a credit scoring system that includes a variable for the applicant’s character.

Over the years, my Rules-of-Thumb have proven to be valuable to many small businesses. But since 2008, with all of the problems associated with big banks, those who have followed my advice were much less likely to find themselves without access to credit. This was because every independent community banker I spoke had emphatically said they had never stopped lending to their small business customers.

Recently, I talked with two presidents of independent community banks about working with small businesses and the health of the banking industry. First, Mike Menzies, who is not only the president of the Easton Bank and Trustin Easton Maryland, but he’s also the new Chairman of the Independent Community Bankers Association (ICBA). Mike’s also a long-time member of my Brain Trust. Secondly, there is Charles Antonucci, President of Park Avenue Bank in mid-town Manhattan.

They agreed with my advice.

A community bank is not a little big bank

Wall Street’s too-big-to-fail banks were the parents of the 2008 financial crisis. But one-size-fits-all reform reaction to the crisis by Congress and regulators is turning Main Street banks into collateral damage, as if they were too-small-to-matter. Here’s why anything that unnecessarily burdens community banks should concern every small business owner.

At the end of 2012, there were 7,092 banks insured by FDIC, of which 6,201, or 87%, were community banks with less than $1 billion in assets. Banks are classified by asset size, and the average community bank has just over $200 million in assets. By comparison, two big banks – Citigroup and Wells Fargo – are each the size of all 6,201 community banks combined.

Small business owners don’t care much about a bank’s asset size. But they care very much about certain bank characteristics that manifest uniquely in a community bank as its special sauce – relationship banking. To a small business owner a community bank…

… is locally owned and managed.

… takes into account a business owner’s character when making loan decisions.

… decides small business loans by a local committee, not credit scoring by a computer.

This definition is important because, by definition, all small businesses are undercapitalized. How this translates out on Main Street is that sooner or later, and more often than not, small business owners will need to avail themselves of a community bank’s special sauce.

According to the Independent Community Bankers of America (ICBA), even though community banks have only 20% of all bank assets, and hold less than 20% of total deposits (FDIC), they make almost 60% of small business loans. This tracks closely with our own research. In a recent online poll we asked small business owners about their banking relationship and 53% told us their primary bank, including for loans, was a community bank.

A recent FDIC study confirmed that community banks serve all Main Streets: Of the more than 3,000 counties in the U.S., about 20% are represented only by community banks.

Bank loans are the largest source of growth capital for America’s small businesses, which just happen to create over half of the U.S. economy and employ over half of its workers. Consequently, regulating Main Street banks the same as Wall Street’s too-big-to-fail banks puts in jeopardy America’s small businesses and the economy.

Small businesses and community banks are the twin pillars of America’s Main Street economy.