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Borrowing at the Bank

Have you ever wondered what the mystery is about borrowing money. Down at the bank. Maybe it's because we have no idea exactly how the bank determines whether you get the loan. Maybe it's just the fear of the unknown. Then we listen to country music they always mention how Merle Haggert's daddy could borrow money just on his name. Down at the bank

Hi, this is KC Truby from the high plains of Wyoming...the coldest place in America but that's ok, because "I look good in blue"... this is one of the rare places where it snows sideways. The state tree is a phone pole, and it's so dry here most of the time, our water is only wet on one side. A lot of folks ask why I live here... that's easy; no one else wants to.

I stopped at a filling station the other day. There was a sign on the door. It said "don't ask us for information. If we knew anything do you think we'd be living here." Sometimes when the wind is blowing just right, and there are no clouds we can watch TV and I'll see the ads about how the banker is helping the small businessman line up special financing, just by stopping in "down at the bank." I wish the guy that does those commercials was the same one approving my loan.

If you're like most small business owners, it generally seems that getting money out of the bank is like the old Silver City dentist pulling out a tooth that had gone bad. The old dentist would slap some salve on your gums and stand on your chest with a pair of pliers. Yank, until that gnarly tooth came loose. That's an ugly picture of making a withdrawal. Of course, in Western history there are other ways of getting money out of a bank.

About 45 miles north of our place up here in Wyoming there's a quite valley, the south fork of the Powder River runs through it and if you've got a four wheel drive, or a horse with new pair of steel shoes on him, you get up into this valley. When you get here you'll find the remains of a national headquarters, right along the river. These national headquarters are now just a couple of log cabins left to rot in the Wyoming winters but at one time belonged to Bob and Scott, two of the most famous people in American history for getting money out of the bank. As Paul Harvey would say.... Here's the rest of the story.

Our famous Wyoming bankers called their national headquarters from which they ran a successful operation for withdrawing money "The hole in the wall" and old Bob and Scott were better known as Butch Cassidy and the Sundance Kid. It's fun to go up there. It's a peaceful place now, but I'll bet it was exciting a hundred years ago. Of course, there's a footnote to all this. Their expertise at getting money out of the bank ended up in most of the gang getting hung, and our famous entrepreneurs got themselves shot in South America. Not much of a future in running a business that way. So, let's look at how we can get financing for our business with out a noose attached to the loan papers.

The number one reason we don't do things is that we're a little apprehensive. Most often we're afraid of dealing with the bank, because we don't know what they want or how to present our request. So, I'll let you in on a secret. Here is what the banker is going to ask you. Right off the horse. He wants to know....

  1. How much money do you need?
  2. How long do you need it?
  3. What are you going to do with it?
  4. How are you going to repay it?
  5. What will you do if you don't get the loan?

Now, how did I choose this topic? Well, I'm going through it. I've got a big project in the chutes for next year. My wife would like to open a bookstore and coffee shop up here in Casper, so she is going to need some financing. I figured that we can open the place with about $75,000 in inventory, $25,000 in fixtures, $20,000 in operating capital, and another $25,000 in up front advertising to get it off the ground. Anybody who would start a business without an advertising budget committed up front, is plum nuts to think they're going to make it. The hardest thing to get in business is a customer. If you don't have a way to bring in the buyers, you don't need to waste your time with the fixtures and the inventory. Now, I can get about half the inventory on trade credit. But that means I'll need around 90,000 to get this place open. I'm willing to put up a third of that plus I've got the initial operating capital tucked away in a CD that's coming up. So, with cowboy hat in hand, I'm gonna look for a bank to finance $60,000 towards this future emporium of the printed word.

The first rule of successfully dealing with a bank, is DON'T WAIT until you need the money. Line it up in advance. We're planning on opening this bookstore in the spring of next year, some 8 months away. But if I wait until APRIL I sure might be in for some sad surprises. Can you imagine spending the next 8 months on the groundwork for this bookstore, and then finding out that you can't get it off the ground for lack of financing. Wouldn't that be a pretty big waste of 8 months of work? Instead, we're going to line up the financing first, then I'll get a location, and then I'll get the inventory ordered, and plan the store layout, build the fixtures and write the advertising.

The financing is the most critical point of opening this new business since I can't do anything without the money. Why do anything at all until you have the money lined up. Now this "Down at the bank" article is NOT JUST geared to start-ups. What I'd like to do here is help you work with your banker for emergency lines of credits, inventory financing, expansion funds, and other money needs. Let's figure out how to develop a relationship with a bank and then expand on that relationship so that when you need funding, it's there.

I'm a big believer in planning ahead. If a business owner waits until they run out of customers, to start advertising, well, they're acting "plum nuts." That kind of planning is a fast ticket to the roller coaster at the county fair. You're up and down all the time. If you wait until you need money to find it, you're going to be just as sorry. You see most times when you need money you need it in a hurry. I know it's happened to me a lot of times. When I sold office furniture at auctions, I'd get a call from someone who may have a warehouse of desks that they would sell to us right now at 10 cents on the dollar if I could come up with $40,000 this after noon. Well, I knew I could sell those desks at auction over the next few months at 25 cents on the dollar so I had to have a source for the money.

Think of all the times you've been forced to pass up good deals because you didn't have a source of cash already lined up. One that sticks in my craw was a commercial real estate deal, where a guy had to sell 10 acres right on the main highway. My realtor called me and said this is a very, very, good idea to buy this 10 acres. If you can lay your hands on 100 thousand dollars by Friday at 5:00 p.m., he sighs, "I'll even go in partners with you." Well, I looked at it, but I didn't have the money or the financing pre-planned to pull off the quick purchase. I could have probably gotten a loan, but the bank would have taken two to three weeks to do the deal, and I had until Friday. So I passed.

The guy who did buy it, sold it 47 days later for $450,000. TARGET was looking for a new store and they bought the land next to this 10 acres and drove the price of the place up to the sky. If I had spent some time working with my bank before hand, if I had developed a better relationship, I would have had that $350,000 of profit in my bank. The real cost of not planning is the lost opportunity. If I had made the $350,000 profit and then put it into a bank investment fund over the next 20 years I'd have a million dollars at retirement. Not having pre-planned to borrow at a moment's notice cost me a million dollars at retirement. Don't wait, smart business sense says. Plan NOW. Don't wait until it rains to climb up and fix the roof. So, let's go together "down to the bank." Do banks loan money to small businesses? They do now days. It used to be that every little bank in America wanted to be in foreign loans, or oil exploration, or merger and acquisition bonds. But, most of these banks are wiping the egg from their faces and rediscovering the small business. I guess it doesn't make any sense today to go to South America to drill an oil well, when there's a pretty good customer right across the street.

Now, listen to this. Someone in a bank told me that we were considered a high-risk business. That the policy of their bank was to discount credit card transactions by 4% for companies like ours. I'm paying 2.25 % discount. And she wants to move me to 4% because she can't understand my business. I can tell you we have been a corporation for over 10 years, have excellent credit, and we run about $80,000 a month through our banks on credit cards and the rest of our billing is done on electronic transfer. We have a no cash business. Deposit slips don't go out of our office. If our business was so foreign to the banks representative that she would announce us as high risk right off the bat.

What kind of relationship are we going to have? I had to find someone who could understand our futuristic information business. When selecting a bank...You should look at selecting a bank as if you were selecting a partner. You're going to be with them for a long time and you want to make sure they're the right one. Ask yourself these questions. Do they know anything about my business? Some people will not want to do business with the same bank as a competitor. I believe that is nonsense. I want to work with someone who knows as much about my type of business as possible. Someone who can give me advice from their experiences of working with others like me.

Do they want my business? Some banks are becoming more aggressive in soliciting business. Remember that a bank is a business. They need your business just like you need their money. Many banks today instruct their loan officers to hit the streets and seek out business relationships with the growing and successful businesses in the neighborhood.

What kind of charges and interest rates can I expect? It is a mistake to wait until the last minute to ask the bank about the cost of services. If you don't voice your concerns about their fees during the negotiations and approval process you may find yourself with a take it or leave it deal at the last moment before closing. After you have a mental commitment in your mind to do the loan it is hard to successfully argue for a better interest rate.

Pick a bank with money. In 1983, I didn't realize that some banks can run out of money. I needed a business loan to expand my office furniture business. The loan was approved, and I figured I would have a check in the next few days. But, the bank kept coming up with excuses to delay the closing. They called to look at my inventory, and then they called to see past income tax returns. It seemed to be something new every week. I was so excited to have the approval that I never even thought about asking for a commitment date. After 4 weeks of waiting, I finally got mad and went in to see the president of the bank. He gave me a lame excuse and recommended that I liquidate some of my investments to get the $75,000 I was looking for.

4 months later, the FDIC captured the bank as insolvent. It had nothing to do with me. They didn't have any money to loan. I should have been suspicious long before this happened. The last time I was in there to make a withdrawal, I had to stand around the teller window until somebody made a deposit.

It doesn't hurt to ask other business people in town who they bank with, and find out what kind of service they get. If you find that half the business owners in your neighborhood are banking with one of the 6 banks in the area. There's a good chance that this is the one bank that wants the local business trade. Some banks don't want your business. Oh, they will take your checking and savings account, But they would rather put their loans into correspondence pools or Treasury bonds.

Rainy day banking. Another thing you might want to check on is the bank's lending history during the last recession. Lots of banks will make a loan during good times but some will close the doors during a recession. You may not want to develop a relationship with a bank that's going to run for cover just when you may need them the most.

What's their policy for holding deposits? Many banks will have a standard policy of holding your deposits for 3 or 5 days. This can put a real damper on your reputation if you have a check returned insufficient funds because you wrote it on money you thought you had. But, unless you ask them to clear your deposits when they're made then that's as good as its going to get. Most banks are negotiable on this point. If you ask.

Talk to those you know first. The best place to start looking for a bank is with the one you know. Call and make an appointment, to meet in your office or theirs and ask the tough questions about what they know about your type of business, if they are aggressively looking for loans from businesses of your size, if they can provide advice and consulting to help you be more successful. Ask if they provide training seminars from time to time on how to be more successful. It's also a great idea to have the banker come on out to your place of business and look around to.

Back up banks and secondary sources. It is good business to have a second bank on the back burner. If your bank knows that you are talking to another bank, it may encourage them to try a little harder. One word of caution here though. If you try to play one bank against another you may end up making them both mad and get a cold reception the next time you are in for a visit.

What do business owners want? In a recent survey they wanted a banker who is responsive to their credit needs, and knowledgeable about their businesses. Someone who has taken the time to learn about the customer's business and who will support the customers position with the bank. If you find a banker that can provide this kind of service it may well be worth more to you than getting the lowest interest rates.

The application: Whenever you're going into the bank, be prepared. Bankers love details. The more information you can give them the happier they are going to be about dealing with your application. This is especially true in the last 5 years with the increase in government scrutiny that banks many loans on file are receiving from the bank examiners.

When I put in for the bookstore, the banker looked over my application and said, "oh you've missed a line, what's the name of your current bank." I said, "Piggy." If you go in cold without prior lending experience with this bank, you should bring in your tax returns and your financials for the last three years. If you haven't been in business for three years or if your a start up, you're going to need to bring a personal financial statement, which is simply a list of all your assets and liabilities.

I was in the bank the other day and overheard a loan officer talking to a business owner. "You're assets look fine, what about your liabilities?" "Oh," he says, "I can lie with the best of them," Borrowing money from the bank is not like getting a new car. If you have clean credit it does not mean you are going to get a loan. Banks want to know if you are going to be able to pay the money back.

The bank wants to know exactly what you're going to do with the money. So you will need to provide them with a business plan that outlines exactly how you came up with the loan amount requested and where your going to put it. If you say, you just need to pay some bills, the red flags go off. If you have bad cash flow now, all a loan is going to do is let a bad problem get worse. This is going to tell the bank that you must have slow accounts receivable collections, or bad inventory turnover, maybe your loosing clients or a new competitor is undercutting you.

Banks don't look at themselves as life savors. If you need money to fund a growing business or to purchase long term capital assets your chances are a lot better than trying to get the bank to cover poor business management If you're a new business owner, here are the key questions the banker is going to ask.

1. Do you have any expertise in this type of business?

2. Do you have a good credit rating?

The second question is probably the most important, so it may even be a good idea to call the bank and find out which credit reporting agency they use so that you will have the same report that they will get. If you see mistakes on the report, like old bills that have been paid that show as still open, it's going to take you about 4 weeks to get all the problems cleared up. What I did when applying for my mortgage in Wyoming this past year was to get a copy of the report before applying at the bank. I then found a medical bill that I had paid three years ago, still open as a past due bill. I called the collection agency, and squared it away with them. They wrote a letter to the bank and I later sent the letter to the credit reporting company so that they could fix my records.

Noone in the collection or reporting industry cares about your problems, so be prepared to use a lot of patience and take some time when cleaning up your report. I can tell you this though. No bank is going to talk to you about loaning you money if you have open, past due bills on your report. You must clear off any old past due debts before they will even consider your application.

Bankers realize that business owners are involved in a lot of transactions and do a lot of business deals, not all of them turn out rosy. If you have had a problem with a lawsuit or vendor, with a logical and straightforward explanation many of these items can be explained away. Remember the banker is going to have to defend their decisions to their boss and you want to give them as much non-emotional explanation as possible.

The one thing a banker does not want to do, though, is become your partner. They do not want to end up owning your business and having to figure out what to do with it. Now you're convinced the banker will never get it. But your job is to convince them that they'll never get it.

Another common problem with borrowing from the bank, is the lack of income you show on your tax records. Most bankers are aware of the efforts you make to reduce your taxable income as a business owner. Help the banker see where the money is and explain in detail what you have done to defer taxes. If you have broken the law, in order to pay less taxes, don't bother applying for the loan. No banker is going to want to put his money at risk in a company that may find itself seized by the IRS Many a business owner has untold wealth. And that's what the revenue agent will get you for.

It is always a good idea to have your accountant with you when working with the bank in order to provide a clear third party explanation of how the numbers are arrived at and possibly a second opinion about your cash flow and ability to repay the loan. Don't let the accountant do all the talking though. You're the one who is borrowing the money, and you are the one who is going to have to sell your plan to the bank. The accountant is an excellent source of help for putting your loan package together. They have experience in working with banks and can make your presentation look a lot more professional by gearing your package toward the banker's needs. Also, it gives your request more credibility when prepared professionally by a third party.

Remember the two most important things you can do in your written presentation is:

First, give a one-page summary with the five questions answered at the beginning of this article.

  1. How much money do you need?
  2. How long do you need it?
  3. What are you going to do with it?
  4. How are you going to repay it?
  5. What will you do if you don't get the loan?

Second, give the cash flow projections on a spreadsheet. That will show how you plan to pay the money back. Maybe even give two cash flow projections with the second one being a worse case scenario. Banks like to know what you're going to do if everything goes wrong.

Regard your bankers as partners: Make sure you have them out to your location. Introduce them to your staff; let them see your production in action. You may even give them a sample of your product to touch and hold. Show them how you plan to bring in customers, how you, and what you do in your bookkeeping department to keep tight controls on your cash.

Bankers are human beings. All things being equal, the banker that knows and understands someone's business is the banker that is more likely to help you get the funding you want. Give the loan officer the chance to report that he has been on the scene and knows the company well.

Ongoing relationships

Look towards planning a long-term relationship with this banker. Your relationship has got to be a win-win for both sides. It's a terrible mistake to think that once you borrow a lot of money your problems are going to be the bank's problems. * Don't be like the old oilman in Wyoming who came into the bank one day.... And the banker says, "we loaned you 2 million dollars to rebuild your wells and the loan's in default". The oilman says, "It could be worse." Then the banker says, "yeah, but we loaned you 5,000,000 to drill two new wells and they came up as dry holes." Once again the oilman says, "it could be worse." "What do you mean it could be worse." ".... Well, it could have been my money.

Let's look at some things to make this relationship more valuable to you.

1. Keep the banker informed. Let them know how you're doing. But, here is the big point; Tell them whenever you land a big contract, or when you have a great sales month. If you are cheerleading for your own company, you will have top of mind awareness with the loan officer. This is going to make it easier to increase your line of credit and easier to get better rates the next time you renegotiate your loans.

2. Pay your loan down from time to time, and then borrow it back up. But show the bank that you intend to repay, by doing it. Banks like all businesses work with the people that work with them. You may even consider letting the bank handle your stock transactions or your retirement fund. Putting these other financial services in the bank where you borrow money makes your account even more valuable to the bank.

3. Use their research and consulting service. The bank may be able to refer you to other customers who need your service, or refer you to people who may be able to help you solve your current problem. It's in the best interest of the bank to make you as successful as possible. Many banks will conduct credit checks and collect information on prospects, customers and suppliers for you.

4. Attend training seminars the bank holds to help you run your business better. I know that it is tough to get out of the office for a day, but hobnobbing with the bank officers is never a bad investment of your time.

Meeting other business owners is also a great way to learn the real skinny on how to make a buck. Even more important, many training seminars the bank offers are actually very good.

Any one who thinks they know everything to run their business has a fool for an owner. Technology changes quickly, marketing and advertising skills are vital to your success, good money management and smart investments of corporate funds can often add another $5, $10, or $20 thousand to the bottom line of a small business. The training seminars are generally free or very low in cost and the bank makes a lot of valuable information available to small business owners.

 

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