By aga merx, Vice President and SBA Department Manager, Bank of American Fork
Small-business owners often ask how to establish a relationship with a bank or their lender. They realize the importance of maintaining a good working relationship to help prepare for future transactions and extensions of credit and loans.
Here are a few points I would suggest for small-business owners to consider anytime. Consider whether these suggestions make sense in your business’ particular circumstances. And, as always, you should get legal and tax advice from a qualified professional.
Open a business account. When you start your business, opening a business account with your chosen financial institution helps establish a history of cash flows, prudent wealth management and a balance in the depository account.
Apply for a credit card when you least need it. People have a tendency to maximize their credit cards and when they are still strapped for cash, apply for more credit. At that point, their credit is at its limit and it’s difficult or impossible for a bank to qualify them for more loans.
Obtain a line of credit. Along the same lines as my last idea, a line of credit for your business can help with working capital and your cash flow cycle, as well as establish a payment history with the bank.
Show income. Here’s an example of why this is significant. Some small-business owners pass expenses through the business so as to lower the income and, consequently, the tax liability. However, when you apply for a loan or you plan on obtaining a loan in the near future, advise your accountants. They may not expense all the items in order to show higher income. When it comes to qualifying for a loan, showing income and the loan repayment ability is paramount, so your bank may need to see that increased income at the time you apply for a loan. Always make sure your tax advisor knows what you’re doing so you have the best advice out there.
Keep clean books. Great records of your expenses and separation of personal and business expenditures helps your bank see the real picture of your business. Your books can be a brilliant reflection of how your business is run. Accurate statements would not show that the personal and the business expenses are mingled. Clean books may give your bank the confidence that the business operates well and has strong management and oversight.
Maintain good personal credit. Your personal credit as a business owner is a reflection of how you may run the credit for your business later on. Additionally, your strong financial wherewithal carries a lot of importance to your banker because often times, you will have to personally guarantee the business loan repayment.
Have a system. Maintain and update your business plan and manuals to demonstrate knowledge of your industry, competition and procedures. It adds to the banker’s confidence that you run a viable and organized business.
Take it to the bank. Some business owners don’t feel comfortable showing their financials to a loan officer because they are friends or neighbors. You may be afraid that your neighbor will divulge information about your personal credit to others. It’s imperative that all small-business owners remember that bankers are bound by confidentiality and privacy and will not discuss or divulge your financial information to the public.
Understand your revenue drivers. Know your key income components and protect yourself from cash flow loss. We sometimes say, “Don’t be a dentist, be an entrepreneur who happens to fix teeth.” That means you should understand your business, see what it takes to grow it and what affects it positively or negatively. Sometimes business owners operate their business to such a small degree that it feels they just have a job and they are overwhelmed by all other aspects of the business.
Retain capital in your business. Don’t draw all of the money out of the business because liquidity is as important as profitability. Whenever a business is going through an expansion or a growth stage, it needs capital. If there is no capital in the business, a loan may be needed. A banker who sees that all the capital was drained from the business may not feel comfortable extending more loans to the borrower.
Financial institutions love working with businesses that operate well, with small-business owners that understand what drives their companies and how particular components affect their profitability. Following some of the suggestions above may help you stand out as a superb borrower to your banker.
aga merx is a vice president and SBA department manager for Bank of American Fork. Her extensive experience with the Small Business Administration started when she worked for the Small Business Development Center, an SBA-approved agency to help small businesses apply for loans, prepare to meet their lenders and prepare business plans. A challenge in SBA lending is keeping updated on constant change in procedures and news from the SBA, so merx keeps up on changes and educates and coaches other loan officers. She is a board member for Community Health Charities, an umbrella charity that focuses solely on health charities like the Huntsman Cancer Institute, Camp Hobé or the Arthritis Foundation. She is an ambassador for the Women’s Networking Group. She is also a board member for Westminsters Women’s Development Program, an organization focused on developing the business skills of the female students and the alumni of Westminster College. merx prefers not to capitalize her name.