Money is the key to keeping your business going. You may be in an early stage, just planning or incorporating your business, but you should have thought through the issue of money, including how you’re going to make it, keep it coming in, and keep that cash flow increasing over time.
In the past, banks were a natural choice for loans, as most people had their own personal accounts in a bank and had relationships with the bankers there. While some of that has changed, there’s still a lot to the idea of creating a relationship with your banker, according to Jay DesMarteau, Head of Small Business, SBA, Restaurant, & Government Banking at TD Bank, one of the 10 largest US banks, with branches in 15 states and the District of Columbia.
Before You Go To The Bank
According to DesMarteau, “The biggest thing you need to have is a business plan.” However, banks don’t generally lend off of a business plan, they look back at your trailing performance.
“If you’re an early stage business, the bank is going to look at revenue and see if you’re tracking what you predicted in your business plan. Costs are fairly well known, raw materials, employees and rent.”
Banks like DesMarteau’s are going to want to see that you have clear assumptions about your market and that your assumptions are panning out over time.
What’s the Best Way to Get A Loan?
The old adage is: the best way to get a loan is not to need one. In today’s climate, probably 60% of companies don’t survive past the second year in business. Most banks won’t lend until you have 2 to 3 years of operating experience.
“That means they’ll use credit cards, friends and family and home equity lines of credit to get their business started,” said DesMarteau, “You need to know how much cash that gives you, and how long it will last you. If you know about that before you talk with a banker, they’ll respect that you’ve thought it through.”
DesMarteau is a big fan of development centers, small business centers, SBA programs, SCORE and the like to provide counseling to potential business owners. TDBank also has a special program with the International Franchise Association to help Veterans get funding for franchises.
You also want to know what kind of loan you are looking for. When a business is just starting out, they usually have two choices for a capital cushion – their credit cards, and a line of credit. The line of credit is working capital, and can be a much cheaper rate than a credit card, but it is backed by the owner’s personal credit, and paid off of business cash flow. So, this is the kind of financial instrument that will help someone like a consultant, or contractor, who has to work for a while before getting paid for a job, and meanwhile may have to front money for expenses. If you are looking to buy out a business, or remodel or upgrade an existing business, that is a term loan, and that is going to be more for someone with an established business and track record.
“Each of these instruments have different underwriting parameters, and different structures,” said DesMarteau. “Educate yourself on the kind of credit you want, the duration of the loans, and what the banks ask for in documentation.”
Create Relationships Before You Need Money
Don’t wait till your business is on hard times or cash strapped to come to talk with a banker. “People in banks have different levels of skills regarding giving business advice. Store Managers at TD Bank have experience in lending. A small businessperson should share their business information with their store manager, and the manager will get a sense of their credit worthiness. Keep an open dialog, and brief your banker quarterly, so they can see your progress.”
Many banks also have small business experts that work from a region, and your bank manager may pass you on to those people if you need more complex advice. Bankers can also help you save your money effectively, by getting a good deposit product that bears interest, or that allows you to invest excess cash until you need it.
Money is key to running your business. Take the time to establish relationships in your bank, learn about the products they offer, and make sure your business is on a firm financial footing as you go forward.