Banking Made Easy
By: Karl R. LaPan, President & CEO, Northeast Indiana Innovation Center
The best time for a start-up or emerging growth company to build relationships with banks is when you are not ready for money or in need of the money today. Banks are looking for track record and credibility and of course cash flow and collateral for repayment. Periodically, brief your banker on your progress, share your goals and provide progress reporting on how you are hitting your milestones and fulfilling you promises. This will go a long way to building a meaningful relationship with your banker.
Starting a small business can be rough, especially when it comes to navigating uncharted territory, like financing. Here are some important considerations to increase your chance of qualifying for funding or picking the right type of funding to support your business: You might not need bank financing right now.
The most important step in the process is figuring out if you even need to go the bank financing route. For example, you might need a loan for the cost of new equipment, real estate, or expansion. Many banks offer asset-based lending products at attractive long-term rates today. Or you might consider bootstrapping or self-funding. It is used nearly 9 out of 10 times by early stage businesses. The book, Customer-funded BusinessAmazon book , outlines five specific non-angel investment strategies and techniques for funding your start-up/emerging business without third party investment. Remember, when you take on an angel investor, you are getting a boss!
Think like a bank.
Bankers will take a variety of factors into account in determining whether you and your business venture are bankable. Anticipate scrutiny and deep conversation with your relationship banker about:
How attractive is your industry as a whole? What is the competitive landscape?Are you financially solid? Wha is the strength of the borrowers or guarantors?How long have you been in business? What’s your track record? Do you have domain expertise, competitive advantages or an edge (secret sauce) in doing something better, faster, cheaper, simpler than anyone else?What is you debt-to-income ratio? How is the cash flow/debt service coverage? What are your financial projections and sensitivities?Is your business able to withstand downturns? How do and will you make money in good times and in lean times?Is your business scalable with high gross margins? High grow margins absolves many sins of running a business.Are you risking any of your own capital (adequate equity structure) for the business?If the business fails, will you be able to pay back the loan?3. Prepare your pitch carefully.A robust business model with a clear roadmap to customers and growth is essential. Be able to articulate the pain/problem/opportunity in the marketplace. Have proof of customer demand for your product or service. In addition, your pitch should include, at the very least, your company’s historical and projected financial information, and at least three years of your business and personal tax returns including a comprehensive Personal Financial Statement (PFS). Be sure to work with a knowledgeable financial professional to create a dynamic financial model with assumptions and sensitivities. You might know a friend or family member, or select a NIIC coach through our affiliate program Side by Side Coaching to challenge your thinking and thought processes. Have the person review it with a fine-tooth comb, making sure that your strategy and analysis makes sense. You don’t want to leave anything to chance so a critical eye and some thought provoking questions and what if’s might just make the difference in your preparation Practice, Practice, Practice.) You only get one shot at a positive first impression!
Keep your options open and flexible.
Securing financing is exciting and essential, but don’t get complacent. Instead, be sure to develop contingency plans in case the bank says ‘no’ or ‘not yet’. Know what the bank wants and expects in a business case for funding. Despite commercials on tv and in print saying there is a lot of free government money out there, you should remind yourself that there is no such thing as a free lunch. There are US SBA loan products and working with a community bank with expertise and volume in underwriting these federal governments loans is critical.
Obtain expert advice.
Know if what you want is realistic with a bank or assess whether you would be better served by an angel investor or a customer-funded business deal. Peer to peer lending and online lending platforms through FinTech companies (Kabbage, Lending Club) are appearing online everyday disrupting the traditional methods of financing a business and providing a variety of platforms for lending and disintermediation. Be sure to do your due diligence on their product offerings and their value propositions since many of these entities are not regulated like our traditional banks. In a future blog, we will cover crowdfunding best practices.
Don’t forget we are here to help, too. Capital is the life blood of any business and NIIC can help you with the many options out there. Your venture may be eligible for certain funding. For information on finding money for your venture and how you to assess what types of capital might be best suited for your venture, contact me at (260) 407-1736. Community banks are integral to small business success. We know many of our region’s commercial bankers and would be privileged to introduce you to them.
Please note: References in this blog to particular FinTech companies should not be inferred to be a recommendation of those platforms.