One of the well-publicized myths of the latest economic downturn is that banks have lost interest in lending to small businesses. The media has joined politicians in bashing banks for shutting off the loan spigot. Although this may sell newspapers and attract votes, the fact of the matter is that banks are actively looking for opportunities to develop new client relationships.
The primary cause of The Great Recession of recent years was the huge housing bubble that burst. In most areas of the country, developers overbuilt, residential real estate values plummeted, and foreclosures reached record levels. As a result, banks are now stuck with the residue (i.e. slow-moving housing inventory). Even as they work to reduce real estate exposure, banks are now looking for other profitable sectors for new business. And a key area of focus is in the small business arena.
Many of the larger national and regional banks have recently announced hiring initiatives targeted at small business bankers, who will be expected to bring in new small business clients. In a recent article in The Street (www.thestreet.com), a well-known online business website, the availability of small business loans was described as ''ample,'' and it was reported that ''banks are expanding small business operations to drum up new business.''
Community banks also are looking to expand small business lending. A community bank cannot grow unless it meets the needs of the individuals and businesses in the local area in which it operates. And small business clients offer an excellent diversification opportunity away from the aforementioned real estate concentrations that caused many small banks to pull back during the recession.
Despite all the evidence, many craft business owners remain skeptical about the willingness of banks to expand small business relationships. Some have been declined for loans, while others may feel neglected. If you count your business in either of these groups, or if you aren't sure your bank is equipped to grow with you, then this is a good time to consider finding a new bank for your craft business. What follows are eight tips that should be followed in finding a bank you can bank on.
1 Ask For Input A good first step is to conduct some research on your options for a new banking partner. Even small towns typically offer several banking alternatives. And if you are located in a city, you likely will have dozens of potential financial service providers from which to choose. Start with a web search of banks in the area and investigate the various sites to find out what each bank offers. Then, talk with your attorney and accountant to see which banks they would recommend as a good fit for your home-based craft business. Another great source can be other small business owners, who can share direct experiences they have had with different banks.
As you talk with professionals and small business owners, ask if they would be willing to introduce you to some bankers. Lawyers and CPAs deal regularly with several small business-focused bankers, and other entrepreneurs often have a very close relationship with their respective bankers. A warm referral is much preferred to a cold call when seeking an introduction with a potential bank.
2 Avoid Problem Banks While you are conducting your research, check out the financial health of the banks on your list. One of the unfortunate consequences of the real estate bubble burst has been a dramatic increase in bank failures nationwide. In 2008, we saw well-publicized large-bank failures, such as Washington Mutual, IndyMac, and Lehman Brothers (an investment bank), but they were just the tip of the iceberg. In the two-year period between 2009 and 2010, more than 300 United States banks failed, a staggering number. And the list of remaining ''sick'' banks is reported to be well in excess of 500.
A troubled bank tends to be very inwardly focused, and many must shrink loan portfolios to meet required capital levels. This detracts from client service, so it is best to avoid starting a new relationship with a problem bank.
So, how can you find out which banks are in trouble? First, find out if the institution received TARP (Troubled Asset Relief Program) money from the federal government and whether or not it has been repaid. The existence of unpaid TARP funding does not necessarily portent problems, but it is a good place to start. Second, because most banks are publicly traded, you should be able to obtain the latest 10-Q information reflecting the bank's financial performance. Recurring losses, low capital, and a shrinking balance sheet could indicate significant challenges.
The higher the credit score, the better. The average United States credit score is 693. The score is determined by five weighted factors: 1) Timeliness of bill payment (35 percent); 2) Outstanding credit (30 percent); 3) Length of time the credit has been active (15 percent); 4) Types of credit (10 percent); and 5) Acquisition of new credit (10 percent).
||3 Check Your Personal Credit Rating Because a bank considers a small business owner and her small business to be an alter-ego, your personal credit rating will be closely scrutinized. If you don't pay your personal bills on time, then the banker will assume that you will be late paying business obligations. A credit score is computed by three primary credit agencies: Equifax, Trans-Union, and Experian, all of which can easily be found online. It is highly recommended that you find out your personal credit score before you get too far down the path of seeking a new bank.
In checking your score, you may find it to be sub-par. In many cases (about 25 percent, according to The Wall Street Journal), this may be caused by inaccuracies. If you do find mistakes, the Fair Credit Reporting Act gives you the right to dispute them. You can even include a statement of 100 words or less in your credit file either to dispute a record that you consider to be mistaken, or to explain a temporary period of delinquency resulting from unexpected hardship, such as major illness, job loss, or drastic income reduction. Even if there are no mistakes that cause your score to be low, you can improve it over time by focusing on improving the five score components outlined above.
4 Focus on Cash Flow If your credit score checks out, your next area of focus should be the cash flow of your home-based craft business. Banking 101 dictates that loans must be supported by a demonstrated ability to repay, and small business loans are repaid primarily from small business cash flow. Nearly all craft businesses suffered cash flow hits during the prolonged recession. Some failed, while others struggled to survive. The fact that you are still in business provides some proof of the resiliency of your home-based craft venture.
At the most basic level, you have positive cash flow if you have more money coming into the business than there is going out. A net profit (as opposed to a loss) is the best proof of positive cash flow, but there are other things on which to focus. Not only do the inflows of the business need to cover all expenses, but they also must meet all debt payments, as well as increases in inventory and accounts receivable not financed by trade payables.
If your cash flow has been negative and you have been forced to use personal resources (or support from outside investors) to keep the doors open, don't give up on finding a new bank. Analyze the business for potential expense savings, debt retirement, and inventory reductions to improve cash flow. A well-supported analysis that demonstrates positive future cash flow as the economy shows improvement could be the difference between a ''yes'' and a ''no'' if you seek new financing (or even refinancing) from your prospective bank.
||5 Put it in Writing Although it may not be necessary to write a full-blown business plan, it is highly recommended that you provide a synopsis of the business and the financial services desired (particularly if loans are involved) in searching for a new bank. Included in your introduction should be the history of the business (longevity and reputation mean a lot to bankers), major milestones, background and experience of owners and key management, and ownership structure. Following the introduction should be an analysis of the market you serve and major competitors, and what makes your business stand out. A SWOT (strengths, weaknesses, opportunities, and threats) can be an excellent way to present pertinent information in a concise format.
If you have been through a difficult period financially in recent years, as most craft business owners have, provide some narrative on how your business has survived and what you are focusing on to improve performance. This would be a good place to summarize the previously referenced cash flow analysis.
Next, you should include an outline of the financial services requested. If you have a loan request (even if it is a refinance of existing bank debt), explain the terms requested and how the loan will improve the business. Bankers like to see specifics around financing requests, as it demonstrates a good understanding by the owner of the impact of debt.
6 Be an Open Book Along with your narrative, the banker is going to want to see financial information on the business and the owners. Expect to provide at least three years of CPA-prepared financial statements and/or tax returns on the business, as well as current personal financial statements and tax returns on the owners. If you have interim financial statements (i.e. for the three- or six-month period following your fiscal year end), include them as well. As the economy continues to recover, your interim information is likely to reflect corresponding improvement in the business performance. This will help build your case.
Likewise, be prepared to provide additional information as requested by the banker as part of the loan application process. If you haven't included interim financial information up front, it may be requested. Other follow-up information might include schedules of accounts receivable, inventory and accounts payable, checking account statements, and asset appraisals. The more forthright you are with information, the greater the likelihood that your loan request will be approved.
7 Ask about the SBA The Small Business Administration guaranteed loan program is utilized by many banks to extend financing that otherwise might be considered marginal or even unacceptable. The way the program works is the bank extends the loan directly to the business with the SBA providing a guaranty for a percentage of the loan (can be as high as 85 percent for loans of $150,000 or less).The program has been recently expanded by the federal government to cover higher loan amounts (can be up to $5 million), reduce fees on a temporary basis, and allow more flexibility for refinancing of existing debt. The goal is for the program to have an even broader impact on access to capital for small businesses. But there is no minimum loan amount, so the program is applicable for even the smallest home-based craft business.
An SBA guaranteed loan might be the best option for your craft business, given the increased flexibility the program provides. A small business can qualify for a loan even if collateral is insufficient, as long as the cash flow can be documented to cover repayment. And the allowable loan terms are longer than those typically made available for conventional loans. For instance, an equipment loan can be extended for up to 10 years, compared to five to seven years for conventional financing. The positive impact on cash flow can sometimes be the difference maker in the loan decision process.
You will need to do some homework to find out which local banks participate in the SBA program. Rankings are published and can be found online. You can also contact the SBA directly and ask for a list of banks that are active in your market. It is advisable to deal with a bank that has significant experience in SBA lending if you decide to pursue the guaranteed loan path for financing.
To learn more about the SBA, check out its website at www.sba.gov.
8 Become a Multi-Service Household Just as you seek to cross-sell as many craft products to each customer, banks focus on multi-service households (client relationships) in their business development efforts. The best known services are those related to loans and deposits, but many banks offer dozens of financial services. Your new bank will want the opportunity to work with your business and with you personally. Other services might include credit cards, debit cards, cash management, lockbox, online banking, automatic bill pay, and programs that offer discounts to the employees of small business clients. Many banks offer trust services, plan administration (such as 401k), brokerage, and investments. Some even sell insurance.
The more services you are willing to buy from your new bank, the stronger you will solidify the budding relationship.
Many banks are hungry to establish new small business relationships. Now might be just the right time to find a new financial services provider for your craft business.
How did you like this resource? Your feedback helps us provide resources that matter to you most.