There's one simple thing entrepreneurs need to do to get a banker on their side. Sadly, most of them miss it.
Does this scenario sound familiar? Your company has a long history of working with the same bank, on terms that seem fair, even though you would like more credit. You’ve had to pledge all kinds of assets as collateral, and you feel like your bank is well protected. You’ve never missed a payment, only rarely tripped a covenant, and your books are always in reasonably good order. You and your controller decide it’s time to see if you can get a better deal from another bank.
You pull together your financial data and a good summary of your company, and reach out to a banker who has called on you from time to time. After the meeting, you and your controller look at each other and say, in unison, “They didn’t get it.” And they didn’t. After a few days, the banker calls back and says he or she can’t help you.
There are all kinds of reasons why financial institutions may decline to extend credit to a small business. The one that is the most under your control, and the one a business owner can fix most easily, is simple: Make sure the financial institution understands your company. Entrepreneurs need to be able to explain what their company does in a single sentence. That may sound easy, but very few people can do it. Maybe they don’t understand how important it is.
Lenders and investors see literally hundreds of plans and ideas each year. If they’re going to make sense of it all, they need to figure out, in a very short amount of time, what a business does, how its cash flow works, how it can be financed, and for how much. The best financing sources are often experts in a particular industry or have a good understanding of how small businesses work.
Successful entrepreneurs grab the attention of financiers by clearly communicating what they do, regardless of the complexity or technology in their business.
In one sentence, you must express the core competency of your company—what it is really good at. Then, you need to follow up with a few key points:
Place yourself in an industry: “We manufacture and distribute flexible tubing to the heavy road and infrastructure construction industry.”
Give a size range: “We have $4 million in annual sales and 22 employees.”
Explain who your customers are: “We sell directly to smaller regional players and to larger suppliers to the majors.”
A description like that allows me to think about:
What’s going on in your industry? Maybe you’re dependent on large construction projects or government spending.
Which parts of the company could be financed – maybe inventory or receivables.
Factors that could impact sales. Maybe your company will be affected by growth in infrastructure spending or consolidation among customers.
Larger forces that could affect your business. Factors such as the relentless drive for scale in a particular industry, the growth opportunity from new technologies, and the potential for more or less public spending could all be important.
Only after I get that picture settled in my mind can I move on to EBITDA, cash flows and collateral.
Here’s how you should practice your pitch:
First, try it out on a friend who doesn’t know your business well, and in particular, someone who isn’t in financial services. If your friend looks at you quizzically and can’t figure out what you do, refine and simplify your story until they get it.
Then find a safe person in the financial services industry to listen to your pitch. Having a knowledgeable third party hear your story creates conditions for the best feedback of all. They won’t be sitting there trying to decide whether or not to finance your company, and you won’t be worried about getting a check.
Then, get your controller and make a call on your new bank, and walk out of the meeting knowing that they got it.
Based in New York, ED POWERS is a managing director and head of the Capital Access Funds team at Bank of America Merrill Lynch. Capital Access Funds is an experienced, returns-driven private equity fund-of-funds.