Banks can play an integral role in the long-term success of your business, says Michael Benson, Vice President/Akron Metro Manager at Consumers National Bank.
“While banks are always interested in lending to businesses, they are required to do so to healthy companies that have a high probability of repaying their loans,” Benson says. “So, the banker has a vested interest in the success of your company and doing what it can to put you in a better position to achieve your goals.”
When you take the time to review quarterly financial statements and talk about what’s happening in your business or to ensure that your banker and CPA know each other, it can help you in good times and when times turn tough.
Smart Business spoke with Benson about how to build a stronger partnership with your bank.
What are some key points to consider when choosing a method to fund your business?
When you’re ready to look at the various options to fund your business, it’s helpful to focus on three key areas:
- Purpose of funds — This will drive the type of borrowing that is needed. For example, if you need to fund operations as part of your normal cash flow cycle, then a line of credit is the most appropriate tool. Banks expect that you will use a line of credit to fund short-term working capital needs such as payroll, materials and other short-term expenses, and then pay down the line as you get paid for finished goods. If you need equipment, vehicles or other fixed assets, a term loan should be used. Generally, term loans will have a three- to five-year payback period for most equipment and vehicles. However, very large pieces of equipment are sometimes financed up to seven years.
- Availability of cash — Even if your business is flush with cash, you should always make sure you have sufficient reserves, as it is possible for sudden growth to eat away at those funds. If arrangements aren’t made for a backup (line of credit), it is possible to grow the business out of existence. When you seek financing, the bank is always interested in your cash reserves to provide reassurance that your business could survive a downturn. There are also times that a business may present the idea of a significant down payment on a fixed asset, but the bank recommends a lower cash investment. This happens in cases where the bank does not want to see the business deplete all of its reserves.
- Expected return — Finally, you must consider whether it is likely that your business will get a big enough return from the investment. Not only should you do financial projections on expected revenue and expense changes, but you should also work to make sure these projections are as realistic as possible. Thinking in terms of ‘worst-case scenario’ helps you to anticipate difficulties and plan ahead for them.
How do factors such as the size and status of your business affect this decision?
Exercise restraint when taking on new clients in high-growth conditions. If you add equipment and labor costs, these expenses will have to be confronted in a slowdown.
Conversely, if your company’s growth is stagnant, you should work to keep costs down, be as efficient as possible and be disciplined about your line of credit usage.
There is sometimes a temptation to use the line instead of dealing with cost cutting. This results in an embedded line, with no availability of cash for future working capital needs.
Regardless of the growth opportunity, a smart business takes on growth in a slow and careful manner. Otherwise, you increase your cost structure and put yourself at risk in the event that the growth is not sustained. You need a vision that is rooted in a path for success. When you take the time to forge a good working relationship with your bank, you’ll typically gain a partner that can help you plan for success, as well as take a vested interest in your success.
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