Lending Money and Advice Bankers can provide more than just money; they also have experience and knowledge.
By Alan B. Corbet
Every small business owner seeking capital feels that if they could just get the money, they could get their business going. But what if you get the money and don’t spend it as your lender recommended? After all, you know your business better than the lender, so how can it hurt to buy the better office furniture since you know you can get by with less inventory anyway?
That thinking can, and does, lead to trouble. Lenders who have been in the banking and finance business for any length of time have seen many successes, and many business failures. Many times business owners only give their banker what they think will get them the money. But because experienced bankers have worked with most types of businesses before, they have valuable expertise to help you succeed.
Follow the Lender Many years ago, an entrepreneur was looking for financing to purchase a gift shop. The entrepreneur was very organized. She was buying an existing business and had spent several months planning for the purchase. The existing owner of the shop provided her with inventory purchase histories, as well as the previous year’s gross sales. Everything looked great. But, in order to convince the loan committee to make the loan, small conditions were put on the loan approval.
The loan request was for $100,000 to purchase inventory and equipment. The conditions seemed minimal; spend no more than $75,000 on the inventory and $25,000 on updated equipment. But that’s not how the money was spent. The business owner knew she could get by with $50,000 in initial inventory purchases, and other beginning costs were starting to add up quicker than she originally thought. So, she spent the extra $25,000 on new software, office supplies and other miscellaneous items. The entrepreneur was certain sales would increase to make up the difference, and that when it came time to reorder inventory, the cash would be there from the projected sales.
Bumps in the Road But there was bad news. After taking control of the business and working hard for two months to maintain the sales volume, her inventory supplier went out of business. The business owner was able to find a new supplier, but with higher costs than the business had experienced in the past.
So how did she fix the problem? She went back to the bank to get more funding to overcome the setback, and, more important, to purchase needed fresh inventory in anticipation of holiday sales. But it wasn’t an easy fix. The banker was disappointed that the entrepreneur had not spent the money as the bank had required, and her request was met with great resistance on the part of the bank’s loan committee. In fact, the bank initially denied the request for additional funds because the borrower had not followed the lender’s instructions on the first loan.
The good news is the business owner did get the additional financing she desperately needed, but she had to pledge her personal residence as additional collateral.
Keep in Touch The moral to the story is: Use your banker as an advisor. Had the bank known the business owner would end up buying fewer inventories when the original loan was granted, rather than finding out when the business owner was in a panic, the approval process of the new loan might have been quicker.
Most bankers have a lot of talent and experience in helping businesses. The closer your relationship is with your banker, the easier it is to borrow additional funds when they are really needed.
If you only speak to your banker when you’re looking for a loan, or once in a while between loans, they won’t know a lot about your business. Banks have many customers. The more they see you and hear from you, the more you’ll stand out. If you only speak to your banker when times are tough and you need more cash, they have to rely solely on the financial information you provide, and may not be aware of what a great business you operate. If you correspond frequently with your banker, they’ll already have a sense of your business structure and products. So, when it’s time to get the advice (or money), your call will be the first one they return, and you will be the first application they’ll handle of the many sitting on their desk.
Some winning strategies with your lender are:
• Stay in contact with them quarterly (send them a note about a recent big sale). • Invite them to your holiday gathering. • Offer to take them with you to a favorite charity golf outing or art exhibition. • Send them your top five key performance measures quarterly, and show them how you continue to beat your goals.
And, always call them first when times are tough. Every business has its peaks and valleys. If you are corresponding when things are great, they can better help when problems arise. So seek their advice.
Alan B. Corbet is executive director of the Growth Opportunity (GO) Connection, Inc. He can be reached at (816) 235-6143, by e-mail at or online at www.goconnection.org.
