Bank Local

Bankers are not very popular these days. Neither are they considered very trustworthy. A quick search on Google or Bing brings up quite a collection of articles about declining trust. Here are two examples.

• What Banks are Still Missing: Trust, May 4, 2009
• Trust in Banks…gone! How to get it back? November 17, 2010

A healthy mistrust of banking is very trendy. Distrust of large financial institutions is as American as apple pie. The second and third Presidents of the United States were both leery of banks. President John Adams was no friend of banks when he said,

Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they can have done or ever will do good.

Thomas Jefferson also had some scathing words.

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs. 

The problem with the universal condemnation of banks and bankers is that it is misplaced. There are several banking systems. Adams and Jefferson were writing about a national bank. The recent financial meltdown was caused by another type of bank, the “too big to fail” banks and financial institutions. These are the banks that consumer guru Clark Howard calls “giant monster mega-banks.” However, locally owned and community based banks still deserve our trust and respect. If anything good comes out of the financial meltdown and the near collapse of the big banks, it may be a return to banking at locally owned and community based banks. If this happens, then it is part of a larger trend of doing business locally.

Many modern banks and financial institutions are primarily transaction processors and speculators, but those are new roles for bankers. Banks, especially in small town America, used to be the institutions that helped start small businesses and made it possible for people to buy homes. When little boys and girls saved their allowance or paper route or babysitting money, they dutifully took it downtown to the bank, and the friendly banker put it into an account and marked the deposit in a passbook. Banks encouraged people to put money away for a rainy day or to save for big purchases. Before the days of MasterCharge (now MasterCard) and BankAmericard (now Visa), banks encouraged customers to save for holiday shopping with Christmas Club Accounts. Now banks encourage customers to take on high interest rate debt. It is hard to say which came first, the rise of giant banks or the change in social mores from planning and saving to debt. In either case, too much debt is a huge part of the morass in which the world finds itself today. It turns out that easy credit had consequences.

The solution is to return to banking as it used to be. If you know where to look, you can still find a friendly banker. There are still places where children can deposit their allowance into passbook accounts. You can still find bankers that will discuss your business plan and work with you to help your business succeed, and there are still banks that will lend you money because the loan committee knows you personally, and they consider your character as important as your FICO score. A community bank  in Central Texas runs an ad where the banker asks, “Who is your banker?” He’s not asking the name of the bank. He’s asking the name of the person at your bank that knows your name. Do you bank where someone knows your name?

Local and community banks in your town also support neighborhood business. They have a vested interest in the success of the local grocery or pharmacy or hardware store because they shop in those stores. When the banker lends money to someone to open a new restaurant, it is not simply another loan to generate profit for the bank. Instead it is a new business for the community and another place that families, including the banker's family, can go out to eat.

Neighborhood bankers don’t just want local business to make enough money to repay their loans. They want local businesses to be successful so that the community is prosperous. When local banks make a profit, the money stays in the community and supports local business.

If you long for the days of a friendly banker that knows your name and not just your account number, if you want to do business with someone that will take the time to learn your business and wants you to succeed, if you want to bank with someone that is part of your community and not just a branch of some giant corporation, then it is time for you to start banking with the locally owned banks in your community.

Borrowing money for your business

All businesses borrow. They need cash for operations, and they need cash to invest in assets so they can build the business. Businesses can get the cash by they need by making a profit. However this may not be enough for growth.

Generally speaking, businesses borrow for one of three basic reasons. They need money to:

• Get started
• Grow
• Smooth out cash flow

When you started your business, you may have borrowed from family or friends. You may have used your credit cards. It could be that your business is a professional services business, and you were able to start small with just a few clients, and it really did not take much money to get started. Perhaps you turned your hobby into a business. Now you’ve reached the point that you need some money to get to the next level. Maybe you are an attorney and you are ready to hire a paralegal. Maybe you need a new lathe for your woodworking shop, or a new delivery van for the catering business. What do you do?

Good news! Even though you have heard all of the bad news about tight credit, there are plenty of things you can do to make it easier to borrow money. There are only two things you have to know.

1. Know yourself and your business.
2. Know your banker.

Know yourself and your business
You need to know about yourself and your business for two reasons. You need to be able to make good plans, and you need to be able to present those plans to whoever is going to lend you money. Give your CPA and bookkeeper a call and get a copy of your most recent financial statements. While you are at it, get copies of the previous few years. Look at everything and not just the P&L. If you don’t understand financial ratios, ask your CPA to explain them. The ratios are tools that you can use (and your lender will use) to evaluate the relationship between your debt and your assets, how much debt service you can handle, how you manage your cash flow, and whether your business is profitable. If you are a sole proprietor or a partnership, you will also want to review your personal financial situation. If you are not sure how to prepare your own personal financial statements, ask your CPA or bookkeeper for help. You should expect to pay a fee for these professional services, but trying to save a little in the beginning could cost you later.

 Once you understand your current situation, you can start working on the future. If you put together a business plan when you started your business, then this part should be easy. All you have to do is update your plan. If you don’t already have a business plan, then develop one. You can do this yourself. There are guides and templates available in many places. You can purchase planning software. You can also ask your CPA for assistance. The Small Business Administration provides a template. Another place to look for help is the Service Corps of Retired Executives (SCORE). This is a link to their template gallery.

However you develop your plan, it will contain these basic parts.

• Summary
• Overview of the business
• Analysis of the market
• Description of products
• Organization and management
• Marketing and sales plan
• Financial details

With a good understanding of your business and a business plan, you will be prepared to get to know your banker.

Know your banker
What does it mean to know your banker? In this case it means a few things. Some of them may not be possible right away because they take time. Some of them you can do immediately.

• Develop a relationship with the bank and with the people in it.
• Get to know everything your bank can do for you.
• Understand what your banker needs from you.

Develop a relationship with the bank and with the people in it
This should be obvious. Remember the movie, It’s a Wonderful Life. Think about the contrast between George Bailey at the Bailey Building and Loan Association and Mr. Potter. Find a bank that wants to get to know you and your business. Figure out who the George Bailey’s in your community might be, and avoid the Mr. Potters.

The other part of this is, once you find your version of George Bailey, you need to be a loyal customer. The bank will not want a relationship with you unless you demonstrate that you want a relationship with it. You should do most of your business with your new bank. You should also try to do it in person. When you walk in the door, you want the people in the bank to recognize you. Loyal customers are as important to your bank as they are to your business.

Get to know everything your bank can do for you
Many business people simply cannot imagine the range of services available at even the smallest community bank or credit union. Most people know about checking and savings accounts. They know about money market accounts and CDs. People know about loans such as mortgages, auto loans, and personal loans. However, did you know that many banks also provide merchant services? Did you know that your bank could help you install an ATM in your store for customers? Did you know that your bank can probably set up a lockbox arrangement so that customer payments can go directly to the bank and your account? Did you know that your bank can probably help with cash management tools such as zero balance accounts? If you need access to cash, did you know you could set up a line of credit instead of borrowing with a term loan? If you take the time to get to know all of the products and services your bank offers you might discover some new ways of managing your cash.

Understand what your banker needs from you
The simplest description of banking is that banks take the money deposited by some customers and lend it to other customers. They pay interest on deposits, and they charge interest on loans. They make money when the interest they charge is greater than the interest they pay. They lose money when customers do not pay back their loans. This means that your banker needs you to deposit money. Your banker also needs you to borrow money and pay it back. If you want to borrow money, you have to make the case that you will do just that.

That is why your first steps were getting your financial statements together and developing your business plan. You will need your financial statements and business plan to make your case. You will typically need the current year and the previous two or three years. Ideally your financial statements will demonstrate that you are solvent and have appropriate liquidity. They may also show how you handle payables and receivables. In short, the statements will explain your current situation and your history. If the statements reveal any serious flaws in your operations, be prepared to explain them.

Your business plan will tell the story that you hope will unfold. You will describe your company and your customers. Your plan will describe your products and why customers will buy them. It will explain your marketing and sales plans. Finally, your plan will make clear how you will use the money you borrow. This is the most important part because it will also explain exactly how you expect to pay the money back.