The most confusing and frustrating relationships for many entrepreneurs are those with bankers. It can seem like banker speak a completely different language to many entrepreneurs. In fact, it is not so much like a language difference as it is a difference in culture. To understand bankers, entrepreneurs must learn about the norms, customs, and values that are part of this banking culture.
First and foremost is the need to understand what bankers consider a bankable business. It has very little to do with those things that get entrepreneurs excited about their own business, such as opportunity, upside potential, and vision. To a banker, a bankable business is one that will pay back its loans with very little chance of anything going wrong. So rather than getting excited about untapped markets or product innovations, bankers look for things like cash flow. In fact, what bankers look at in a potential business loan are these three factors (listed in order of importance):
1. Does the business have more than enough cash flow to support the loan repayments? Note that this criterion says ?more than enough?, and not just ?enough?. Most bank loans will require excess cash flow that equals several times the actual loan payment. And remember, they like to see this cash flow already in place, not projected in the future within a business plan.
2. Do the owners have enough income and wealth to pay back the loan if the business does not prove to be able to pay back the loan? Forget about the corporate veil of protection from creditors when it comes to bank loans. They will require personal guarantees and personal financial statements from the owners and their spouses. This may go away after your business becomes very successful, but plan on this for the foreseeable future.
3. Are there business assets that can be used, as a last resort, to pay back a loan? Banks don?t want to try to collect your accounts receivable, sell your inventory, or liquidate your equipment. Don?t assume that such collateral is what banks like to see in a business loan proposal. This is usually a last resort backstop from a banker?s perspective.
Bankers? values are based on the fundamental belief that risk is bad. Where an entrepreneur seeks situations to prudently pursue risk, bankers want to eliminate almost any trace of potential downside risk. It is not that bankers only lend money to people who don?t need it, it is more the case that bankers only lend money to those that they are very confident will repay it.
Entrepreneurs can help reduce risk for bankers through the many programs offered by the SBA. One program that is often overlooked is its 504 loan program that can be used for the buildings and equipment that a business may need to help grow. Understand how your business addresses the three criteria listed above, and become familiar with programs such as those offered through the SBA or any local economic development agencies before you begin to meet with bankers so you can position your proposal to them within a context that minimizes the perception of risk.