TWENTY WAYS TO IMPROVE YOUR BANKING ABILITY
Today, the equity markets have become tighter and the debt markets looser. There is less venture capital available, and the banks have more money to lend. Hence, it's not surprising to find entrepreneurs now seeking to raise capital from their friendly banker. Here are a few techniques and tips for being more successful in locating a good bank and a great banker.
1. Never pick a bank, always pick a banker. The individual you work with is usually more important than the institution you chose.
2. The best way to find a good banker is to ask for a referral from a successful entrepreneur. The nicest thing a customer can do for a banker is to offer a good referral.
3. After you have a banker and are negotiating a loan, don't use your corporate lawyer. Find a lawyer who represents a competing bank and retain that law firm for your negotiations. Obviously, they'll be familiar with the issues, and your negotiating power will increase perceivably when you use a competitor's legal council.
4. Try not to fill out the bank's forms for personal finances. Rather, substitute a signed and notarized form that you have prepared ahead of time, which gives the same level of information. Do not inflate personal financial statements, as false statements can come back to haunt you.
5. In addition to knowing your loan officer and his background, become familiar with the bank. Know what's hot and what's not. Real estate? The middle market? What is the bank seeking to specialize in? From annual reports or quarterly statements, you can usually find out where the problem loans are; most likely the bank will be timid about lending in that area for a few years. This can be vital information.
6. From the bank's financial information, determine its loan-to-deposit ratio, a key indicator of its lending aggressiveness. If it's climbing, the bank is lending and if it's shrinking, the bank isn't lending. The ratio usually runs about 60 to 70 percent. (At urban banks, the ratio may be higher.)
7. Banks typically claim that for every one dollar they have in assets, they like to lend out 60 cents and keep 20 cents in cash and 20 cents in secondary reserves, which can be made liquid in one or two days. How does your bank check out on these ratios?
8. A banking rating service can supply you with a report on any bank, analyzing its strengths. It can give you details not commonly accessible, because its information comes from regulatory agencies that monitor banks. For instance, it can tell you the level of Third World debt or insider loans. For more information, see "How Safe is Your Bank", Entrepreneurial Managers Newsletter, (Vol. 9, #5, February 1988) or contact: Veribanc Inc., P.O. Box 2963, Woburn MA 01888; 617/245-8370.
9. The Harvard Business School has an excellent case analysis of the New Venture Group at the Bank of Boston. Contact: Publishing Division, Harvard Business School, Soldier's Field, Boston MA 02163. Ask for case #9-286-070. by W.A. Sahlman. The cost is $10 for this twenty-three-page case; it's a best buy.
10. Don't forget that a good bet might be an SBA guaranteed loan: As much as $750,000 for a term of seven years. Call the SBA field office nearest you or call the SBA Answer Desk at 800/368-5855.
11. Banks are in the business of lending money and are not hostile to small business owners who are knowledgeable and fully prepared. Submitting a written business plan with your loan request is crucial. It shows that you are an above average candidate for a loan.
12. It is usually helpful to listen to tapes or to read a book on banking before making a presentation to a banker. I recommend the following: How to Plan and Negotiate a Loan by Kenneth W. Spanks (hardcover, 188 pages, $20;available from Walker & Co., 720 Fifth Avenue, New York NY 10019) How To Get a Business Loan Without Signing Your Life Away by Joseph Mancuso. A four hour audio tape, with a 116 page workbook ($60; available from the Center for Entrepreneurial Management, 180 Varick Street, 17th Floor, New York NY 10014; 213/633-0060). A book is available on this topic - see the Club Store. Material on borrowing is also available from banking consultant and former bank president Somers White, Somers White Co., 4736 N. 44 Street, Phoenix AZ 85018;602/952-929?)
13. The best source of listing of banks and bank information is Polk's World Bank Directory. Contact: R.L. Polk & Co., 2001 Elm Hill Pike, P.O. Box 1340, Nashville, TN 37202, 615.889.3350.
14. The best source of commercial lending training materials for banking officers is Robert Morris Associates, which offers a wealth of information on how to become an effective loan officer and supplies accepted financial forms for a business plan. Contact: Robert Morris Associates, 1616 Philadelphia National Bank Building, Philadelphia PA 19107, 215/665-2658. For Robert Morris Forms, contact: Bankers Systems, Inc., P.O. Box 1457, St. Cloud MN 56302,612/251-3060
15. The American Banking Association (ABA) is the banking industry's trade association. They hold seminars for banks and offer publications telling banks how to analyze small business loans. For example, the ABA sponsors a two-day conference for banks seeking to specialize in small business activity. The fee is $575, and it is an excellent method to learning how bankers think. Two useful publications offered by the ABA are Analyzing Financial Statements (#054601), $25.00, workbook (#054602), $7.50, and Asset Based Lending, Student Handbook, (#621600), $19.50, Lender's Guide (#621601), $18.50. Contact: American Bankers Association, 1120 Connecticut Avenue N.C., Washington D.C. 20036, 202/663-5000.
16. Two good general pamphlets describing SBA loan functions are "Business Loans from the SBA" and "Your Business and the SBA." Published by the Office of Public Communications, they are available from regional SBA field offices, or call the SBA Answer Desk at 800/368-5855.
17. A good source of seminars and publications for the banking industry is Executive Enterprises, 21st Street, New York NY 10010, 212/645-7880.
18. Your accountant is your most crucial link to your banker. That is not to say that other professionals are not also good contacts, but if your banker and your accountant don't like or trust each other, your chances of successful borrowing are greatly reduced.
19. Not everyone has to personally guarantee corporate bank debt, but banks will tell you that everyone does. Your task is to find small-business owners who borrow without personal guarantees, and then determine what they have that you don't.
20. The only time to raise capital is when you don't need it. Bankers prefer to lend money to borrowers who have borrowed money at least once and have paid back at least one loan on time. It's a psychological factor like preferring entrepreneurs to have accounts at multiple banks and relationships with multiple bank officers.
My advice is very simple. You must have multiple bankers and banks if you hope to grow a business. You can never be sure your bank is not in trouble or shifting its business objectives.