How to Build a Profitable Relationship With Your Bank

Step 1: Understand how your lender looks at the world.

Your banker is one of the most important people that you’ll deal with as a small-business owner. But the two of you probably have different ways of looking at the world.

Typically, entrepreneurs are more willing to assume risks. They are, for the most part, optimistic people focusing on the upside of any given opportunity. In most cases, they are not heavily regulated. For them, when it comes to growth, more is always better.

Compare these traits to those of a typical banker. Bankers are by nature risk-avoidant because their job requires them to focus on the downside. Banks are highly regulated. They are fine with growth, but take a much more conservative approach, wanting to make sure that there is a solid plan in place.

By understanding how your banker thinks, you’ll be in a better position to build a solid working relationship—and secure a loan.

What You Should Ask Your Banker

While the bank has final say over loan approvals, you have the ability to choose which lender you do business with. As you interview potential bankers, here are a few questions you should ask.

» What is your experience with my industry?

» How does the size of my loan compare with other loans at this bank?

» What happens if I hit a bump in the road?

» Is your bank actively growing its loan portfolio?

» How are loan decisions made at your bank?

What Your Banker Wants to Know

For starters, your banker will request two years of income tax returns, for the company and each owner. The bank also will want two years of financials, along with interim financials for the current year. You might also be asked for a personal financial statement and an accounts receivable and accounts payable aging report.

Your banker will want to know how you report financial results. Were they internally prepared? Did a CPA review them? Have they been audited?

The bank will also inquire as to your ownership structure. What does the decision-making process in your organization look like?

They will also inquire about your professional providers, including the board of directors, CPA, attorney or any consultants you might retain.

Other likely questions:

» What is your market like?

» Who are your customers?

» Who is your competition?

» What are your competitive advantages?

» Where will your company be in five years?

Other Useful Information

Bankers like data and information that will back up your request. Here is a partial list of items to provide bankers, preferably before being asked.

» Timely submission of financial statements.

» Early notification of problems.

» Explanation of large movements in sales, inventory, expenses, etc.

» Budgeting. This could include the income statement and balance sheet, which demonstrates how the business has been performing.

» Income statements with comparisons to prior periods, including such items as gross margin, owner salaries, depreciation, other noncash expenses and one-time nonrecurring expenses.

What Your Bank Doesn’t Want to See

Any of the following red flags could kill your deal.

» No budget. This should be obvious. Don’t even waste your time or the banker’s time without one.

» Poor credit score or no credit references.

» Inability to understand or explain your own numbers.

» Complicated ownership structure.

» Tax income that’s very different from book income.

» No management team.

» Inventory is growing faster than sales—a sign of potential cash flow and margin concerns.

» No “skin in the game.”

» Poor communication, infighting or lack of honesty.

» Your primary concern is what the interest rate will be or if you will have to sign a personal guarantee.

Understanding how banks think and operate, along with being prepared, will go a long way toward successful loan approval and a long-standing banking relationship.