The financial crisis has hit practically every segment of the U.S. economy hard. But the fallout has been especially tough on small businesses looking for financing to fund working capital, growth, or expansion.
In the current economic environment, dubbed by some as “the new normal,” most banks have tightened the screws on small business lending. This can make it hard even for companies with strong credit ratings to get business financing.
However, the problem for many of these companies goes deeper than the current credit crunch: It originated with things they didn’t do before the financial crisis.
Specifically, many small business owners fail to build relationships with their banks long before they actually need to borrow money. Unfortunately, when they need funds, banks are less likely to lend to them because they don’t know them as well as they do their noncredit customers.
Bankers tend to look with a wary eye upon business owners who only show up when they need to borrow money. Therefore, one of the keys to obtaining financing is to be proactive and establish a strong relationship with your bank long before you need a business loan.
While most people think of a bank as a place to go when you need to borrow money, the fact is that commercial banks offer a wide range of business services beyond loans. These include checking and savings accounts (both business and personal), cash and treasury management, merchant card (i.e. credit card) processing, short-term investment vehicles (like business money-market accounts and certificates of deposit), and trust and investment management.
Banks are especially fond of deposit dollars. Why? Because deposits are the foundation upon which all other banking activity takes place.
Banks receive low-cost customer deposits primarily in the form of checking and savings account balances and short-term investments, and they use this money to lend back out to the community. The “spread” between the interest banks pay on deposits and the interest they collect on loans is a bank’s primary income. So one of the first things bankers usually want to know when they’re approached by a business owner for a loan is whether the business owner is a bank customer. Most banks give priority to customers, and in today’s credit environment, some banks even require businesses to maintain checking or savings accounts with them to be considered for loans.
Beyond this, your business can realize many other benefits from building a strong relationship with your banker. For one, a good banker will serve as a trusted business advisor.
Along with an attorney and certified public accountant, the banker forms the third member of what is often referred to as the small business owner’s “triad of advisors.” Your banker could be a source of valuable business assistance beyond just lending money — but only if they know you and your business before you apply for a loan.
Also, your banker has likely worked with many other small businesses that have faced financial challenges similar to yours. They can bring experience and a unique perspective to bear on your situation, perhaps providing advice and counsel in addition to (or maybe even instead of) a business loan.
Don Sadler is a freelance writer specializing in business and finance. Reach him at firstname.lastname@example.org.