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Banking Tips for Small Business Owners in Honor of National Mom and Pop Business Owners Day

Mom and Pop ShopHappy National Mom and Pop Business Owners Day to our fellow small business owners!  In honor of this special day, we would like to share an article that was recently published by the American Bankers Association.  The article, titled ‘Five Tips to Increase Your Chances of Getting a Small Business Bank Loan’, provides valuable banking tips intended to help small business owners develop a mutually beneficial relationship with a bank, obtain loans and evaluate offers:

1) Get to know bankers at several financial institutions in your community.

Prior to requesting a loan, find out which financial institutions in your market make loans to firms similar to yours (due to the fact that not all banks specialize in business loans). Banks may make loans based on industry, while others may only lend to those in certain stages of the business life cycle (no startups, for example). It is important to work with bankers who understand your industry and find out how the current financial crisis has affected credit availability in your community.

Another reason to deal with banks experienced in your industry is that they can offer you financial advice. If these bankers work with firms facing the same industry-related problems as you, they may be able to provide helpful advice and financial products tailored to your firm’s needs. Seek a banker who can give financial advice that will help you survive and thrive in today’s economy.

2) Be able to articulate your firm’s “value proposition” to its target markets and your business plan to reach them.

To increase your chances of getting a loan, articulate why other companies or customers should do business with you and how you’ll effectively compete in your chosen target market segments. To help ‘sell’ your company, develop a business plan that has three different scenarios: best case, most likely case, and worst case. You want the banker to understand all three since you’re asking for support through good times and bad.

3) Think like a banker.

It’s important for the banker to see that you recognize the risks of operating in your industry and that you have a plan for dealing with them. Have a plan that outlines solutions to those risks and share it with your banker. Bankers are going to do a risk analysis anyway, so it’s important for you to provide a perspective that the banker hasn’t considered.

4) Develop at least two ways to repay the loan.

Be sure to discuss possible repayment alternative options with your banker before the loan is made.  Some of these options could include the pledging of business or personal collateral as well as the addition of a loan guarantee by the firm’s owners, suppliers or customers. The more certainty that the banker has that the loan will be paid “as agreed,” the more likely it will be that you not only receive a favorable loan decision, but also the best interest rate.

5) Don’t ask for loans that should be funded with equity injections.

Bankers aren’t paid to take equity risks; they get paid to make loans that will be repaid on time. The amount of equity you need to operate your business will depend on several factors.  One of the most important factors relates to your industry and what role your business plays in that industry. The amount of equity required for a manufacturer will be different from that required to run a wholesale distribution business.

The stability of the industry is also an important factor influencing the amount of equity needed. Firms in stable industries need less equity than firms operating in industries undergoing rapid change. The reason is that firms in stable industries can carry a higher level of debt due to the greater certainty of their revenue streams.

Another factor that determines the amount of equity required for your business is your company’s business model. The sales terms your firm offers its customer base has an important impact on the amount of equity that your business will need to operate. Any additional customer or supplier financing reduces the amount of permanent working capital that needs to be funded with equity contributions from your firm’s shareholders.

We want to thank the ABA for providing the Small Business community with this valuable information!  Stay tuned for more ‘Tips for Small Businesses’ to be released throughout the year.

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