Managing the Money (Part 3) - Dealing with your Bank
In Part 2 of this multi-part series on managing your MSP’s money, we discussed some tips for selecting the right bank (or banks) to safeguard your funds. In this article, we’ll talk about how to deal with banks as a small to mid-size business, especially when it comes to how to better prepare and present your case to persuade the bank to finance the growth of your MSP.
It’s the economy
Banks have stereotypically been portrayed as powerful institutions with all the advantages (after all, as bank robber Willie Sutton might or might not have said, “that’s where the money is”). In recent times, however, many banks themselves have been struggling to survive. Unfortunately, this seemingly humbling experience hasn’t made them any easier to deal with. If anything, it’s been just the opposite, as those banks have dramatically dropped interest rates paid on savings, increased fees on all kinds of accounts and transactions, and tightened their criteria for granting a loan.
A recent study for the Financial Post showed that SMB businesses in general are more dissatisfied with their banks than the average consumer. And dealing with banks has become more challenging than ever at a time when SMBs such as your MSP may need them most. One of the areas in which the changes most affect businesses is the new challenges involved in getting a business loan.
The right lender
As noted in Part 2 on choosing the right bank, you don’t necessarily have to obtain your loan from the same bank you use for your checking/savings, but there are advantages to doing so. In fact, some banks may require you to open accounts with them before they’ll give you a loan. That means looking at their loan policies and practices is an important part of selecting the right bank in the first place.
In the U.S., Small Business Administration (SBA) subsidized loans offer protection for the bank in case you default, so you may want to find a bank that makes SBA loans if you anticipate needing to go that route (more on that later).
Interest rates will vary, with larger banks usually charging lower rates than community banks. However, you are likely to have a more personalized relationship with the loan officer at the smaller bank. This can be important if your “numbers” (credit scores, Profit & Loss statements, etc.) don’t look as good as you might want; you’ll want to deal with someone who also takes into account your reputation in the community and personal knowledge about your character.
Presenting your case
You might have heard the old saying that banks will only give you a loan if you can prove that you don’t need it. While that’s not entirely true, what you do have to prove is that your business is solvent enough to be able to pay it back. Banks – like anyone else – don’t want to throw money into a losing proposition. And it’s not enough to have a good business plan; you also have to be able to present that plan so that the decision-makers can be confident in your ability to repay.
The first step is to gather the documentation you’ll need to prepare your loan application, which can range from your articles of incorporation to the legal descriptions of your real property, and will almost certainly include your financial statements and business plan. You might also be asked for your personal financial records and personal tax returns.
The more detail in your presentation, the better. It’s their money, after all, and they want to know exactly what you’re going to use it for. Will you be purchasing new equipment, buying a new office building, upgrading your current building’s infrastructure? Do you need a long term loan to finance a large capital expenditure or a short term loan to meet payroll during a temporary cash flow crisis caused by an unexpected setback?
Do you have the projected cash flow to allow you to comfortably make the payments on the loan? Be prepared to show how much money will be coming in and what expenses you anticipate, and an amount above the difference that will allow you to budget for the loan payments.
You should be prepared to offer some sort of collateral – assets of value that you pledge to guarantee the payback of the loan. They’ll want to see that you’ve been profitable in the past; the longer your stable business history, the better. Of course your credit record is important, so you start building the basis for a loan years before you actually apply to the bank to borrow money.
What if your record isn’t pristine, you don’t have enough assets, etc.? If you’re in the U.S., that’s when an SBA backed loan can come in. The SBA will guarantee a percentage of the loan so that the lender is taking less risk – and thus is willing to loan to borrowers whose “numbers” show a higher risk. If you need a relatively small amount of money for short term purposes (under $35,000), you might qualify for an SBA “microloan.”
Note that SBA loans are only available to qualified “small businesses” so if you’ve grown beyond that designation, your company isn’t eligible. However, the definition of “small business” is pretty generous, with service businesses providing computer-related services eligible with average annual receipts of as much as $25.5 million.
Banks aren’t the only potential source of financing for the expansion of your business. In Part 4, we’ll focus on the pros and cons of soliciting investors, what to be on the lookout for and how to make it more likely to be a win-win situation for both parties.
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