Care and Feeding of Bankers Is Key

Jim Morris, chief executive of Envirotech International in Houston, had a problem. He needed a way to establish credit for customers who wanted to finance his company’s water treatment systems.

His first discussions with local bankers were discouraging. Envirotech had only been in business two years, and bankers traditionally require three years of financial statements before considering a business-loan application.

In his ultimately successful quest for financing, Morris learned a big lesson: You can never tell a banker too much about your business.

Many small-business owners think that bankers know everything about all kinds of businesses, but that isn’t true. The small-business owner needs to make sure the banker understands what the business is all about and why the money about to be borrowed is so critical to the venture’s success.

As Morris persisted, he finally met Joel Pearson, an assistant vice president at First Interstate Bank of Texas, who agreed to review Morris’ customer list and equipment brochures.

“With that information, I was able to show Pearson how we differed from other water companies by not using chemicals,” said Morris.

“They went through their sales pitch,” said Pearson, who later agreed to consider loan applications from Envirotech clients. “They were certainly enthusiastic and excited about their products.”

Morris, who recently moved his 14 employees into larger quarters, attributes much of his company’s success to support from Pearson.

Small-business bankers say they wish more entrepreneurs would find out what a banker needs to feel comfortable. And, they say, the very best time to set up a banking relationship is before you need the money.

“Invest time talking with prospective bankers,” said Douglas Freeman, executive vice president of Wells Fargo Bank’s business loan division in San Francisco. “Explain your business, its cycles and its cash needs.”

“Bankers don’t like surprises,” said Williams Arant Jr., president and chief executive officer of First National Bank of Knoxville, Tenn. “The worst thing in the world is to hear something is wrong with a client’s business through the grapevine or to read it in the newspaper.”

Besides open communication, Arant said the thing that makes a banker most comfortable is the “feeling that the customer really knows his business.”

Frank Mynard, chairman of the American Bankers Assn.’s small-business banking unit, said if problems develop, don’t wait until the last minute to call your banker.

“The worst thing a small business owner can do is beg his banker for help on a Thursday because he can’t meet a Friday payroll,” Mynard said.

He said dealing with entrepreneurs is interesting and dynamic, but frequently a challenge.

If you want to gain a banker’s confidence, ask for something specific. Do you need a long-term loan to refinance existing debt, expand your business or introduce new products? Do you need a credit line to provide short-term working capital? How about a business credit card for keeping track of travel and entertainment expenses?

Once you’ve figured out what you need the money for, be prepared to present three years’ worth of financial statements, business and personal tax returns, a historical summary of the business and a secondary source of repayment.

You will also need a clearly written current balance sheet, profit-and-loss statement, cash-flow projections and information on accounts receivable and accounts payable.

If your business is incorporated, your banker needs to know if the stockholders will cover the losses. If you are in a partnership, the bank usually requires all principals to sign a personal guarantee for the loan. Sole proprietors will be asked to back up the loan with personal assets such as a home.

Bankers are not magicians, and there is little mystery surrounding how they decide whether to lend you the money. In addition to historical and industry factors, lenders rely on ratios to determine short-term liquidity.

A quick way to figure your liquidity is to add up the cash on hand, accounts receivable and marketable securities, then divide that sum by your current liabilities including accounts payable, loans outstanding and salaries.

But remember, every industry has its own ratios. If your ratio is 3 to 1 and the industry average is 7 to 1, you won’t look like a very good risk to a loan officer.

If you want to please a banker, read “Steps to Small Business Financing” before applying for your next loan. The fact-filled booklet is published jointly by the American Bankers Assn. and the National Federation of Independent Business. Single copies are available for $2.50 by sending a check to Small Business Financing, NFIB Foundation, Box 7575, San Mateo, Calif. 94403.

HOW TO MAKE YOUR BANKER LOVE YOU

Think of your banker as a business partner.

Invite your banker to visit your business to see exactly what you are doing and how you do it.

Communicate regularly--the good news as well as the bad.

Remember, bankers hate surprises.

Find out exactly what kind of documents a banker needs to process a loan--because inadequate documentation creates unnecessary delays.

To generate enthusiasm for a proposed product or service, ask your banker what he or she thinks of it. An involved banker is more likely to make a good presentation to the loan committee.