capital | The Age of the Customer

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.

Is crowdfunding investment capital right for your business?

In previous columns I introduced three crowdfunding sources including donation fundraising, startup transactions, and lending. Now let’s talk about the fourth and most problematic method: raising capital from investors.

Historically, small businesses acquired investor capital from two sources: venture capital and angel investors. So when crowdfunding popped up on our radar, many in the entrepreneurial universe got excited thinking the Internet could be used as a lever for investor capital as it has for other business applications. Here are four reasons why I was not among this group.

1. Securities Laws
Remember those two crowdfunding markers identified in my previous columns, “innumerable and anonymous?” Well, they’re the most problematic in raising investor funds because, by definition, the public (people you don’t know) has access to Internet offerings. U.S. securities laws are enormously restrictive about selling investments to the public, and the approval process is prohibitively expensive for most startups. Plus, even as part of Obama’s 2012 JOBS Act, the Securities and Exchange Commission (SEC) has yet to approve crowdfunding for investors and won’t say when rulemaking will happen.

2. Financial reporting
One of the essential markers of investingis financial reporting. Alas, one of the markers of the small business sector is poor financial recordkeeping. When small businesses learn the level of disclosure required for crowdfunding investment, most will not pursue this path.

3. Minority shareholders
Investors become shareholders. A crowdfunding offering is likely to create many shareholders. When small business owners understand the maintenance expense and effort to comply with mandated reporting to shareholders, most will seek other capital sources.

4. Exit strategies
Small business owners love their businesses, but most don’t have an exit strategy. Since capital is not romantic, it’s unlikely that a small business owner’s idea of an exit will align with that of crowdfunding investors. And with no after-market for these shares, crowdfunding creates an inherent exit expectation conflict, which will be a non-starter.

When and if SEC rulemaking occurs, crowdfunding equity will benefit some entrepreneurs. But I predict this capital source won’t be a high percentage option for most small businesses. Crowdfunding is part of the future of small business capitalization, but it’s not for everyone.

Write this on a rock … Don’t count on crowdfunding to replace your banking relationships.

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

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

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.