Lending to small businesses reportedly declined a little more than 1% in 2012, which may not seem like a lot unless it’s your business that needs a loan and you can’t get one.
According to the Federal Reserve Bank of San Francisco, “total business loans under $1 million held by small U.S. banks continue to dwindle.” A report by the U.S. Small Business Administration (SBA) for the first quarter of 2012 showed an increasing demand for loans paired with a tightening of loan standards for small businesses.
And last month a report by online loan platform Biz2Credit found that four categories of small-business lenders — big banks, small banks, credit unions, and alternative lenders — all showed lower approval rates in November than they did the month before. Meanwhile, the National Federation of Independent Business’s December “Small Business Optimism Index” indicates that 9% of small-business owners polled found loans “harder to get,” a 2% rise over November’s numbers.
Banks may be easing terms for large businesses. But for small businesses, times remain tough. So if your business needs credit to thrive, it would be smart to improve your relationship with your bank. A 2002 article co-authored by Allen Berger, a member of the Board of Governors of the Federal Reserve System, stressed “the importance of a bank relationship to small businesses in terms of both credit availability and credit terms such as loan interest rates and collateral requirements.”
And as Jay DesMarteau, head of small business and government banking at TD Bank, currently the nation’s seventh-largest lender of SBA-backed 7(a) loans, says, the best way to do that is to understand your own business and what your bank wants from you.
If you want your bank to be your pal, DesMarteau suggests making the following six New Year’s resolutions:
- I will know my cash flow.
“When we underwrite companies,” says DesMarteau, “the most important thing to us is the strength of the business’s cash flow.”
What the bank wants to know is how much your business is making at a gross income level (revenue minus direct expenses, such as cost of goods sold, not including depreciation), and how much you have available to pay principle and interest on the debt you have and the debt you want to obtain.
“Say you own your real estate,” says DesMarteau, “and you’re paying a mortgage. You have a $100,000 line of credit, you’ve drawn $50,000, you’re paying leases on three trucks, and you want a loan to be able to lease a fourth.
“The bank wants to see a cushion to see if you can afford it. What if you took a 10% hit to revenue? Could you handle a little bit of disruption? How strong is your cash flow? Being able to talk to your banker about how you handled past disruptions, and your plans to grow revenue or reduce expenses, is very important.”
- I will keep track of my collateral.
“If you had to liquidate assets,” asks DesMarteau, “would you have enough to pay your bills and keep the business running? How much do you have in receivables and inventory? The bank will look at all assets and give you a loan-to-collateral ratio.”
- I won’t live large.
The bank, DesMarteau says, will watch what you’re taking out of the business versus what you’re putting in. “When years are good,” he says, “owners take cash out. That’s natural.” But it’s also smart to keep capital in the business. “If you’re taking out every dollar that’s free, that’s not good.
“Owners should always be thinking about what they’re doing to grow and sustain revenue and what they’re doing to control expenses. That discipline forces you to think about what makes your business more creditworthy.”
DesMarteau points out that small businesses are often heavily dependent on the wealth of their owners, and therefore your personal credit history and score is a key factor in obtaining debt. “If it’s good, you’re helping yourself,” he says. If it’s not, you’re not.
Getting a loan is all about “cash flow, and owners, and then how much you have in reserve,” he says. “How much [operating] cash do you have on hand, and what happens if 20% of your customers switch? How long can you stay afloat paying bills until you can find new customers?” That, says DesMarteau, is frequently a matter of personal resources. “You don’t need five years of operating cash on hand,” he adds. “If you have enough to make it through a few months, that’s good enough. And you don’t want everything in the business. If operating cash starts to dwindle, it’s always safer to have cash in the bank.”
- I will have a business plan.
“One of our customers,” DesMarteau recalls, “had a transmission shop and decided to get into the towing business. He didn’t have a plan.”
According to DesMarteau, the owner didn’t know how much the tow trucks, the phones for the dispatching system, or the labor to man the phones 24/7 would cost. “If the person had put together a plan that included the revenue he needed to cover his costs, he might never have gotten into the business.”
In this case, the transmission shop had a loan on its primary business, and the bank started to see red flags in its financials. “They bought three trucks [to get into the towing business] and expenses were increasing faster than revenue.” If the owner had discussed it with the bank before buying three trucks, says DesMarteau, he might have bought only one.
“A lot of small-business owners spend a lot of time managing employees and customers, and if they don’t have a CFO or an accountant, planning can get deprioritized.”
- I will ask what my bank can do for me.
Your business is valuable. Getting and keeping your business is the bank’s business. So don’t be afraid to demand the services you need and, if you don’t get them, shop around.
For example, are you in the right kind of checking account? If you maintain a low balance, you’re likely to be charged fees. Be aware of the minimum balance requirement at which fees kick in.
“Look at the number of transactions per month,” says DesMarteau. “See if your account has a threshold of transactions before fees start. Sit down with your banker, look back at your transaction history, and see if you can get the right kind of deal based on your account.”
DesMarteau also suggests taking a hard look at how your bank serves your needs. For example, when you deposit a customer’s check, some banks make the funds available to you the next day; some force you to wait four to five days. If waiting makes your life difficult, DesMarteau advises that you shop around.
Other services that might be important to you include the bank’s hours (Are they convenient?), the bank’s location (Is it a hardship to get to a branch?), and whether the bank’s electronic services are up to snuff (Can you see your personal and business accounts with the same login? Can you scan checks in your office so you don’t have to schlep to the branch?). It also might be important whether or not the bank offers mobile banking from smart devices. “As people get more Internet savvy and mobile,” says DesMarteau, “that’s not just a nice-to-have, it’s a real shopping point.”