Dr Jeff Cornwall

My column in today’s Tennessean looks at the changing nature of the banker/entrepreneurship relationship:

A lot has changed in banking during this economic crisis. But what can entrepreneurs expect from bankers once credit starts to flow again?

We should expect the rules to be more restrictive on bankers’ ability to lend to small businesses since they will be under tighter scrutiny from federal regulators.

Banks lending to small business will go back to a more traditional and conservative approach based on cash flow, personal guarantees and collateral.

Traditionally, bankers operate with a business model that tries to minimize risk. They are responsible for protecting customers’ deposits held in their banks.

On the other hand, entrepreneurs seek out opportunities that can result in high returns, but their ideas often carry significant risk.

Entrepreneurs need to understand which factors bankers will use to determine what is a “bankable business” based on the traditional business model of a typical bank.

Businesses must be able to qualify for bank credit on their own standing.

This has very little to do with the things that get entrepreneurs excited, 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 to three main factors. They are:

Is there adequate cash flow?

Bankers define “adequate cash flow” not as being just enough excess cash each month to cover monthly loan payments, but significantly more than enough excess cash flow.

Also, bankers want to see this cash flow already occurring, not projected in the future within a business plan. That’s why bankers usually are not the best sources of funding when you open a business.

Get a track record and some cash flow, and you will find that bankers are much more receptive.

Can an owner pay back the loan?

Forget about the corporate veil of protection from creditors when it comes to bank loans.

A bank will require personal guarantees, which means that if the business cannot pay the loan, you will be expected to pay it personally.