In my book, I devoted an entire chapter to banking relationships. When I started out in business, with one employee in a 10’ x 20’ portable building, which was financed, I quickly learned that I would have to use someone else’s money to grow my business. (Since I didn’t have any) I learned quickly how to manage my credit and how to survive with minimum cash flows. There is nothing philosophical about this; it is just plain old bootstrapping. Here are highlights and tips from the chapter on banking.
Managing your credit
- Make sure you don’t allow inquiries into your credit file unless they’re absolutely justified. Many vendors will routinely do these; they lower your credit score.
- Find a community bank where you can have a true relationship. I don’t care what the advertisements say; the large national chains can’t accommodate you unless you are extremely small (needing less than $100k for cars, land and equip), or very large (needing over $3m). You need a lender that wants to understand more than your credit score.
- Obtain and review your credit report ASAP, and subscribe to a credit watch service. I was recently a victim of attempted identity theft, and, without a watch service, I could have been in big trouble.
Planning for and communicating with the bank
- I know it’s hard to do a monthly business plan for the next year or two, but you need such a plan to help you be successful and have something to execute against. Preparing such a plan will help you think about the fundamentals of the business. It’s ok to present the banker with a less aggressive plan. Always present the bank with a plan you can exceed, regardless of what you use internally.
- Make sure you talk regularly with your banker, if only for a minute. Don’t wait until you need a loan to contact your officer. If your banker isn’t taking you to lunch twice annually, find another banker.
- Don’t be too aggressive on interest rates. Someday you will be gold plated, but then they can’t make money on you. I always said that I wanted the banker to say, “He’s one of our best customers, and we make good money on his business.”
Always have a backup plan, and, when possible, maintain two banking relationships. The bankers will push back slightly, but it keeps them on their toes and assures that they won’t take you for granted.
I have helped quite a few recyclers with SBA loans and was one of the first to be able to explain inventory valuation and cost-of-goods issues well enough for a banker to understand and be comfortable with them. This allowed me to borrow using my inventory for collateral. You must learn these issues and be able to talk about them to gain the confidence of your banker. Don’t forget, however, that you must have adequate earnings. Just getting a loan won’t “save” your business. Refer to my article a few months ago: “But Ron, all I need is money.”
Next month: More good stuff from Chapter 4.
Remember, only you can make BUSINESS GREAT!
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Ron Sturgeon is past owner of AAA Small Car World. In 1999, he sold his six Texas locations, with 140 employees, to Greenleaf. In 2001, he founded North Texas Insurance Auction, which he sold to Copart in 2002. In 2002, his book “Salvaging Millions” was published to help small business owners achieve significant success. He now manages his real estate holdings and investments, and does limited small business consulting. You can learn more about him at WWW.rdsinvestments.com (Click on “Interested in more information on Ron Sturgeon”.) He can be reached at 5940 Eden, Haltom City, TX 76117, or firstname.lastname@example.org.