According to an article in the Wall Street Journal, the number of banks in the United States has been steadily dwindling for several years. That decrease means there are fewer banks to lend money to small business owners and start-ups. In fact, the number of federally insured banking institutions nationwide is at its lowest level since at least the Great Depression.
This reality renders the likelihood of a start-up establishing a relationship with a bank pretty unlikely. “There aren’t a lot of banks that will work with start-ups,” says Bill Cobb, president of Granite Loan Management in Denver. According to Cobb, if you’re the owner a small business that’s not considered “hot” or trendy, for at least five years, it’s wise to establish and maintain a solid relationship with a bank as soon as possible.
“Do everything you can to keep that relationship,” he says. Sometimes, that means doing things you might not want to do. Examples of that include divulging certain financial data to the bank you wished to keep private or even reforming the way your financial numbers are presented.
What to look for in a business bank
When shopping for a business bank, Cobb says it’s wise to ask if the bank maintains a Small Business Association (SBA) department. If they do, it means the financial institution will work with small business owners, although that doesn’t necessarily mean their policies are conducive to small businesses.
Cobb suggests entrepreneurs inquire about the bank’s policies relative to small business loans. That means asking things like whether collateral is necessary to secure a loan, whether there are penalties for repaying the loan early and the fees and costs associated with obtaining a loan from the bank. While it is typical that large banks will maintain an SBA department, that doesn’t mean the bank will meet your needs, says Cobb. Generally, community banks “understand how to cater to” specific industries, and their policies are less stringent than their larger competitors. Don’t be afraid to ask, “What do you know about my industry?” Cobb says.
Ted Lape, a Principal with Lazear Capital Partners in Columbus, agrees that smaller regional banks are generally more welcoming to small business owners than large national financial institutions. According to Lape, small business owners generally perceive “they are getting more local relationships and decisions. I think they really are,” he says.
Looking out for your financial future
While Cobb contends it’s important a small business owner establish a close business relationship with a bank as soon as possible in the life of the entity, he does not believe that loyalty should be limited to only one institution.
If possible, Cobb suggests having business accounts with at least two banks. That way, if something goes awry with your primary institution, say, for example, they turned you down for a loan, you can turn to Option B.
“Never put your eggs into one basket,” he cautions.
So how do you maintain a relationship with a second bank? Even if you keep only ten percent of your business’s funds at Bank B, it’s still imperative to get to know the bank’s loan officer, says Cobb. He suggests meeting with that person at least twice a year to establish and maintain a relationship with them and the bank. Doing so will help you “Keep your options open,” Cobb says.
If your business bank turns you down for a loan, Lape says it’s time to cut the ties. “You want to be with a bank that supports you,” he says. And, if, subsequently, several banks reject your loan request, consider non-bank outlets.
In Ohio, an organization exists that caters to start-ups and small businesses seeking loans they might not be able to secure otherwise. The Economic and Community Development Institute, based in Columbus with satellite offices in other Ohio cities, will soon celebrate its tenth anniversary. It is affiliated with the SBA and other funding organizations, and was recently named the fourth largest micro-lender in the United States.
And just what is the greatest predictor of whether you will secure a loan for your business? According to Lape, it’s your personal credit score.