This piece was originally published August 8, 2016.
If you’ve ever had to ask for money, you know how painful the experience can be.
Even at a small scale, asking a friend for a few bucks for pizza or a drink, the sense of shame is there. It’s even worse when you’re young, broke and have to ask your mother for spare change for new shoes after you’ve worn a hole in the toe of every other pair.
Asking for money as a business is even harder. The stakes are higher, the amount lent is greater and the people handing you cash don’t love you like a mother does. Thankfully, there are banks and lending institutions who make it a primary focus to help small to mid-size companies grow through both funding and mentorship.
The lending process might seem daunting at first look, but it’s doable.
If you’re a new small business owner or a young gun looking to get into entrepreneurship, finding clean dress pants that fit to wear to your loan meeting is hard enough without the added pressure of asking a stranger for thousands of dollars. Moving to the south—the land of butter and BBQ—has certainly been hard on my waist line and writers don’t really have to wear “real people pants” anyways, so this would be at the top of my list.
We figured potential loanees could use some tips on how to approach building a banking relationship or securing a loan. Then you can spend your time on the important stuff, like how to hide your muffin top in ill-fitting pants or Youtubing how to tie a tie.
Travis Rouse, principal business relationship manager at Wells Fargo, sat down with me to chat about how founders and leaders at small and midsize companies can keep track of finances and build relationships with bankers in order to acquire funds when they need to grow their businesses.
Here are his tips.
1.) Tell your story.
Let’s start simple. Before delving into facts and figures, you’re going to want to deliver a compelling narrative to your potential loan officer. While numbers are incredibly important to bankers, they’re people too. They are going to be much more inclined to help a business if they understand the people behind it, and believe in their idea. Rouse has been in banking since the early 90s—a veteran in the corner for small businesses—and this is the first tip he gave.
“Share with the banker how you got started, let them see your passion, this will go a long way with building a relationship,” he told me.
2.) Have something written down.
This is another point that seems fairly obvious, but is worth reiterating.
“If it’s all in your head and you have nothing written down, you’re making a mistake”, Travis stresses. He says it’s not uncommon to have a business owner walk in, tell his or her her story, go over a few numbers, and ask what the result is going to be.
Well, decisions can’t always be made instantly and based just on words. It takes homework. Going over financial reports, income statements, business plans, bullet points, presentations and other materials is something lending institutions are going to need to do before they can come back with a decision. Have some prepared materials for the loan officer. This isn’t Shark Tank, this is the real world.
Banks need to make a profit, so they are going to make sure they have enough raw material to be sure you’re going to be a good loanee. You need to come to a meeting with everything you think might be relevant for your potential lender. If in doubt that something is relevant, bring it anyways.
3.) Be prepared for questions.
“When someone gives us a stack of information, what they really want is us to come back with a decision,” says Travis. “We’re probably going to have questions. Let me rephrase that—there will be questions.”
As I mentioned before, asking for money is never fun. It can be like ripping off a band-aid—you just wanna take a deep breath, yank it off and be done with it. Unfortunately, acquiring a loan isn’t a quick process, and there will be back and forth after the initial meeting. You’re going to have to know your finances in and out, and be prepared to discuss them at length at the request of your banker.
Say your company is growing about six percent in revenue per six months, then all the sudden there’s a jump to 30 percent revenue increase over a six-month period. Is this a sustainable growth period? Is it an anomaly? Can it be used for modeling or was this increase just a fluke?
You need to be able to reply with concise answers and citations. Was it due to marketing efforts? A new product? Did you get a shout out from the press that led to increased sales? Being flabbergasted isn’t an option here—bankers can’t lend unless they understand your business. Do your homework yourself, and be ready for some Q&A.
4.) Pick an online banking platform. You’ll thank yourself later.
Doing financial housekeeping on paper is miserable. Growing up, I’d watch my mother sit at our massive dining room table with a spread of paper covering nearly the entire surface. She’d spend hours hunched over working on bills and budgeting. Now, I can do everything she did on my phone in about a half hour.
While online banking for businesses is a different animal than personal banking, there are several platforms and dashboards out there for businesses to keep track of their finances.
Wells Fargo offers the CEO Portal, its own version of business-centric online banking software. You can deposit checks, keep track of expense receipts, manage payroll, and handle compliance issues, amongst numerous other services. The CEO Portal is an additive platform, meaning that as your business grows, the modules and services you add to the dashboard can grow and change in tune with your needs.
If you’re looking to come in and discuss a loan, having all of your finances in one place and in your pocket or on your desktop is a solid start.
5.) Be on top of your Debt Service Coverage Ratio (DSCR)
There are a few key numbers a loan officer is going to need to calculate and evaluate your business upon, and this is one of the most important. DSCR is calculated by dividing net operating income by your debt services, giving you a ratio which acts as a measure of a business’s ability to cover and pay back debts alongside interest.
According to Rouse, the magic DSCR number for cash-flow lenders like Wells Fargo is 1.25 or greater. While not absolutely make or break, this is one of the most influential numbers to a potential lender.
“This number is fundamental for a startup to a mid-stage company, and even up to a $150 million business… Every business lender wants to see this number,” he says.
6.) Think about liquidity.
Even if you’ve done your homework, answered your loan officer’s questions thoroughly, met some key metrics, and displayed a good control and understanding of your finances, things can always go wrong in a business. Bankers want to see liquid assets as a failsafe against a default on loan payments. Liquidity on the balance sheet is a measure of how well a business can “weather a storm” if revenue drops, according to Rouse, and is something loan officers will be looking for.
7.) Establish a relationship.
Say you’re not looking for a loan, or maybe your business is in no state to ask for one. This doesn’t mean you can’t take advantage of a bank’s other small business services. Rouse remembered a client that for two years had a business unable to acquire a loan. The founder still came in quarterly to talk shop, get his finances reviewed and keep up a personal connection with the bank and bankers.
When the business owner was ready for a loan, the process was quick and easy.
“It’s important to build a relationship with the banker,” according to Rouse. You’ll have a dedicated resource that can offer input on your financial statements, discuss your loan eligibility and maybe even make a connection with an advocate who really understands the needs of both you and your business.
Rouse suggests meeting with a business banker for an annual account review, but highly recommends quarterly or semi-annual check-ins. Think of it as a physical for your business. It can be something you might not look forward to, but it’s necessary.
So there it is. Asking for a loan might be a bit of a pain, but it’s probably not as painful as you think. The most important thing before you step into the bank is to do your homework. Have your materials together, be ready to both speak at length about your business and answer questions, make sure your numbers are up to snuff, and just relax.
If you’ve made it this far with your business and you’re still afloat and sane, the hardest is likely behind you.