If you are starting your own business, or even thinking of starting your own business, let me start by saying, “Congratulations!” You’ve already demonstrated the entrepreneurial spirit that it takes to be a success. As you begin your new undertaking, you may have a need for financing. Here are some things that your banker wants you to know before you set off on your new adventure.
1. The risk/reward profile for a business owner is different than that of a bank
One of the reasons you may be thinking about starting a business is to make money. More than that, you may be thinking that starting your business is because the amount of money you can make is only limited by how much work you put into your business. This is a great reason to start a business!
Your bank wants you to succeed as well. This is how you are going to repay the loans you take out and have money to deposit in the bank. What your banker wants you to know, though, is that the bank’s ability to make money on a loan is pretty much limited to the interest that you pay the bank.
Often, a business owner will ask a bank to finance 75% (or more) of the cost of a project. So, while a business owner has an unlimited potential return on this project, the business owner only carries 25% of the risk. Conversely, the bank has the lion’s share of the risk, but has a return that’s limited. Keep that in mind when seeking financing. While the banker may understand the business owner’s vision and want to support the financing request, the risk profile has to be congruous to the bank’s reward profile. For that reason, the bank may not be able to support every request.
That being said…
2. Banks like to make loans
Earlier we discussed a business owner’s desire to increase their personal income. Want to know how I derive my personal income? I make loans. For most bankers, the more loans made means a higher personal income. For me, a higher income is just one of the reasons I like to make loans. I also enjoy partnering with business owners to help them reach their goals. Watching one of my clients succeed is immensely rewarding.
Your bank wants to support your loan request. If there is a way to say yes, a bank will try to find a way to do it. Providing financing to a business that does well is a win-win scenario.
3. Financing a business is different than other types of financing
As a banker, I often ask the question, “How much are you looking to borrow?” The answer frequently is, “How much can I get?” This type of question may work when buying a car or a house. You tell me your income, how much debt you already have, and how much of a down payment you can afford, and I can tell you how much financing you could obtain. Your banker wants you to know that this formula doesn’t work as well for commercial financing. The way a business generates income is typically more complicated than the way an individual does. Understanding how much debt a business can afford to take on involves a thorough analysis of how the business’ sales, expenses, margins, and balance sheet.
This means that your banker is going to ask questions. If you are a new business, just starting out, expect lots of questions. But don’t be offended. The purpose of these questions is to make certain the business isn’t set up to fail. Again, your banker is looking for that win-win scenario.
4. Whatever your costs projections are, they are probably too low
This is something that experience has taught me. You may have poured over your projections and discussed them at length with your accountant, but chances are, there is some cost you’ve overlooked. It could be the cost to license your particular business, or the fact that it will take time to gain new customers and ramp up sales. No matter the reason, it will be unexpected.
While your banker wants you to build your projections based on a realistic model, putting in a contingency to account for unforeseen expenses is prudent.
5. Owning your own business is one of the best decisions you can make
Unlimited financial potential, the freedom to make your own decisions, and the sense of accomplishment of having grown something from scratch are just a few of the benefits of owning your own business. Small businesses are the lifeblood of our communities.
At Marine Bank, we are proud to support the small business community. If you are thinking of starting your own business, speak to one of our bankers today.
About the author:
Eric Flick, Commercial Lending Officer
Eric Flick wants your business, and our community, to grow and prosper. His approach is to get to know you and your opportunities, then to bring you innovative and strategic ideas to grow on. His knowledge and creativity can help you engineer a financial solution for your business.