It's All About The Relationship!

Having a good relationship with your banker is fundamentally important to a small business owner, or manager. Bankers think in terms of having a long-term relationship with their customers, not in terms of transactions - and having that relationship can make the difference to a small business between survival and failure. A bank is much more willing to "stretch" for a company that it knows and trusts and cultivating a long-term relationship that builds this trust over time is one of the more important things that you can do. Bankers are pretty numbers oriented in making decisions to lend; but, when a bank has seen you meet your commitments over time, it's much more willing to break its own "rules" and make an exception for you.

You have some leverage, though, in building this relationship and you should use it to your advantage. The bank wants as much of your business as it can get - both corporate and personal. To some extent this is how the bank defines the scope and magnitude of their relationship with you. Surprisingly, it's not always the profit level that drives the bank's thinking; they just want to know that they are "your bank!"

Put Yourself In Your Bankers Shoes

Understand the bank's business cycle, because sometimes banks want to lend and sometimes they're more reluctant. Loan losses are a key profit driver for a bank and losses tend to lag behind economic expansion and contraction; losses only start to increase well after the economy turns down and they end after the economy has started to grow again. This is not your problem, it's the banks, but it often affects what they are willing to do.

Understand that banks have multiple interest groups that they have to satisfy. A small business is usually responsible only to its owners. A bank is responsible to shareholders (which impacts profit requirements), regulators (which have rules for operating), the community (which has a say in who they lend to), and depositors (which affects pricing). These multiple interest groups make a bank more image conscious, affect how much it charges, and governs many facets of how it does business.

Bankers don't like to make bets and they have different types of loans for different purposes. Get to know the different requirements for a long-term loan and a short-term loan before you ever have a serious conversation with a banker. A short-term loan, such as a revolving line of credit, is to cover shortages in your cash flow cycle. The bank expects you to pay it back periodically (i.e. when you have extra cash) and it often takes it as a sign of financial weakness, if you don't. When a bank gives you a longer-term loan that is paid back over several years, it needs to see that you will have the earnings and the cash flow to make your payments over time. Most banks are not "collateral lenders" - meaning that they don't want to be in the business of liquidating your collateral to get their money back.

Understand What The Bank Needs And Give It To Them

Keep your banker well informed. If he knows who you are, he will be more responsive to your needs. Never, ever let the bank hear bad news from anyone but you - by their nature bankers look for the bad news anyway, so you might as well tell them up front. Send them statements, with explanations, regularly, even if it doesn't appear that they look at them. Invite them to your place of business, make them feel included in your business; they may turn you down, but they'll remember being asked.

Be well prepared - show them that you understand your business. A solid business plan, with financial forecasts that show how you will repay your loan is key. It's always best to show the banker several "what ifs" - i.e. how things might look in the best and worst cases. Tell him what could go wrong and what you would do, if things did go wrong; he is going to think about this anyway, so you might as well be up front with him. This is also a great way to build trust with your banker.