Banks Rent Money, Don't They?

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Need a business loan? 
How to use and improve your relationship with your bank.

Most of us treat banks as if they are utility companies or government agencies. Your bank statement even resembles a utility bill. But don’t be fooled. 

Banks are in business just like you. Only they rent money.

That branch office is a retail outlet. Your banker is a highly trained salesperson. His or her job is to rent you money in a manner that guarantees the bank a profitable return. To that end, bankers want to reduce as much risk as possible.

Remember, banks profit by renting money and they demand evidence that your business can pay it back. To get access to the bank’s money, therefore, you must understand your banker and clearly communicate your needs.

What You Can Do 
 Here are some ways to improve your relationship with your banker.

• Shop around for a lender you can trust to negotiate for you, one who will develop a genuine interest in your business and with whom you’ll have good rapport. The bank nearest your business is not necessarily your best choice.  Check with other retailers, professional advisers and associates who may know loan officers adept at working with retailers.
  
• Know your banker. He/she will represent you to the loan committee, so you should know each other well.  Develop a solid working relationship. Don’t play one banker against another, looking for the best deal. Find the right banker for you and stick with him/her.
  
• Show good faith by following bank policy and keeping your word. Don’t abuse your banker and ruin your credibility by making promises you can’t keep.
  
• Always make an appointment to see your banker; don’t just drop in unexpectedly. (That way, you won’t have to wait in line, either.)
  
• Be prompt with payments, appointments and fulfilling special requests. You expect prompt payment from your customers; your banker expects the same from you
  
• Don’t embarrass or surprise your banker. If you are expecting a problem, warn him/her immediately of the situation. Offer regular updates and appraisals. Your banker also has people to report to and can be embarrassed by surprises.
• Don’t spend the money before you get it. We’re sure you wouldn’t, but some retailers do mail checks before they get the loan, so we thought we’d better include this rule.

• Expect your banker to be promoted. Accept this as an inevitable fact of life and be prepared to start all over again seeking, courting, communicating and educating another banker who is just right for you.
  
• Realize that bankers can be creative. Sometimes they will make loans on a personal guarantee with a 48-hour turnaround without dragging your business through the commercial loan department.
  
• Your banker is in a business, just like you. Remember, your banker is not an ogre playing Monopoly with your store—even though it may seem like it at times. He/she is an employee working for a business similar to yours; the inventory it uses to generate a profit is money. You can negotiate, but somehow the bank must make a profit on your account.
  
• Don’t be ashamed or embarrassed if you need assistance. Remember that you and your banker are businesspeople on equal ground.
  
• Know—and tell your banker—the types of funds you need and why you need them. Do you need a line of credit for a short-term, seasonal stock buildup? Or for long-term expansion?  Short-term loans, those maturing within a year, are for short-term needs. Long-term loans are for fixed assets or permanent current assets, not for fluctuating seasonal needs. If you have mistakenly borrowed short-term money for long-term needs, immediately begin working with your banker to correct the situation.
  
• Preventive maintenance is a good investment for success in bank relationships. Don’t wait until you are on the brink of disaster before you see your banker to educate him/her about your business. For instance, setting up a line of credit with your bank is prudent for those unexpected times you’re short of cash.
  
• Present your banker with a cash flow budget. This plan communicates that you know what you will do with money from the bank, when you will need it and—most important—when you can repay it.  With a projected cash flow budget and a 12-month plan for cash surplus and deficit, you can foresee cash shortages early enough to borrow funds on a timely basis. Falling behind in your vendor payables, thus losing your cash discounts, is the most expensive form of financing and should never happen if you have a good bank relationship.
  
• Be thorough with your formal loan proposals (see: “What a Loan Proposal Should Include”).
  
• Wait until the time is right to negotiate rates. Don’t start bargaining before you’ve presented your complete case. After all, your rate should be favorably affected by the thoroughness of your presentation and by your financial strength. And, yes, then you can negotiate rates. (If you are financially weak, however, you represent a greater risk and higher rates are justified.)
  
• Provide your banker with updated projections and actual results, regardless of whether you are in or out of bank debt. Your banker should be much more than just a moneylender. Keeping your banker informed will enable him/her to provide ongoing financial counseling and may increase his/her willingness to loan you funds on short notice.
  
  

Relationship of Equals Remember, when you request money from your banker, it is a business deal between equals. The bank is a partner in your business—a partner who wants the assurance of reduced risk. It wants you to stay in business because it wants to continue renting money to you.

What a Loan Proposal
Should Include

Loan Request Summary State how much money you need, why you need it (for short- or long-term needs), how you expect to repay the loan, and when you will repay it.

Business Description Describe briefly the past, present and future of your business.

Management Background & References Outline your management structure. List the names of everyone involved and include a short background about each person. (Include this in a first request, or if you have made changes in your management structure.)

Market Strategy Explain your market and your market strategy as specifically as possible. Describe your typical customer, your forecasts, your advertising plan and price structures. Let your banker know how the current economic situation will affect your industry in general and your business in particular.

Financial History & Projections Follow your initial request with carefully compiled financial information:

• three years of financial statements;
  
  
• a list of collateral;
  
  
• a pro forma (projected) monthly cash flow plan;
  
  
• a pro forma (projected) monthly income statement;
  
  
• a pro forma (projected) balance sheet; 
  
  
• the owner’s current personal financial statement
  
  

Contingency Plans Be prepared to offer more optimistic and more pessimistic forecasts as contingency plans. Prepare summary sales plans and resulting cash flow analyses for both alternate plans. Show where you are going and how you plan to get there.

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