Far too many business owners ask themselves, “What’s the bare minimum that I need to do to borrow money from a bank?” If you’re one of those people, please stop that train of thought right there.
Instead, you should be viewing your bank, or any lender for that matter, as a partner in your business. Just as with any partner, the bank has needs and wants. When you satisfy the needs and try to give them what they want, the bank will be more favorable to you than if you’re trying to do the bare minimum.
Let’s discuss three “R’s” to working with a bank that you must know:
Banks live and die by ratios. They have ratios for just about everything. How much of their portfolio is liquid, how much of their investment portfolio is in small businesses, and how much of their portfolio is in companies like yours. The important thing to remember is that banks are stewards of other people’s money, so they cannot take an overt amount of risk. Or in other words, unless there is a ~95%+ chance that they’ll at least get the principal back, they will not likely lend.
Since not all stewards are created equally, bank management has made decisions as to what ratios your business must meet to not only consider you a worthy lending option, but also to not reign in your loan once you’ve received it. Those ratios may be your ability to cover your debt by your income (Income to Debt Ratio), your ability to meet your current liabilities with your current assets (Current Assets/Current Liabilities), or your Return on Owner’s Equity (Net Income/Owner’s Equity). These ratios, among others, will be examined regularly by your lender.
Some of the key ratios that a banker will look at in your business prior to providing you with a loan will be the following (or something similar depending on your industry): Inventory Turnover (COGS/Inventory), Gross Profit Margin (Gross Profit/Sales), and Net Profit Margin (Net Income/Sales). Keep these ratios in mind when working with your banker.
You’ll hear that the relationship is everything, and with banking, it almost nearly is. A bank with which you’ve developed a history of business will be the most likely to make you a loan. They may be even willing to bend their ratios to some small degree.
You develop a relationship by running your finances through the bank: your credit cards, your personal checking and saving accounts, and your business checking. They like to see business, and this will help them feel more comfortable with you.
In addition to using the bank’s services, meeting with a banker on a regular basis the six months or so leading up to requesting a loan may be beneficial.
Finally, bankers love graphs and reports! You will be a banker’s sterling example investment if you provide them with quarterly financials and graphics of your key performing indicators to boot. I have interviewed many bankers who have told me how nice it would be to a financial reporting package for each of the companies that have loans with them. In fact, many of those same bankers said it would be nice even to receive a set of basic financial statements.
Keeping your bank happy doesn’t have to be that difficult. Keep these three “R’s” in mind to understand the way they think, and you’ll do just fine.