Getting funding when you are a small business is difficult enough, but adding to the difficulty is that not all funding options are equal. Sometimes you will have to make a decision and, like anything else, you will have to weigh your options.
Right now, we're going through a banking change at our company. We are changing the bank where we get our main line of credit from. Throughout this process, we've had some excellent choices to choose from. In our case, the challenge boiled down to picking between the best two options we were presented with.
It took many years to get to this point of having a comfortable position to choose between two good funding options. Here are five tips that helped us along the way.
1. Bank with the long term in mind.
Instead of trying to work with multiple different providers for your banking needs, try to consolidate everything to one good bank and develop a relationship with your banking advisor. They can be a great resource as you are building your business, not only for financial solutions, but also for making connections and recommending service providers.
2. Look for funding when you don't need the money.
The best time to fix your roof is when it is not raining. Same thing goes for choosing a bank. Banks do not want to loan you money when you actually need the money. They want to loan you money when you don't need it. (This is why you are pre-approved for all those credit cards when your credit is good and the last thing you need is more credit.)
When you are comfortable and not worried about money, that is the best time to schedule a meeting to talk about getting some.
3. Use competition to your advantage.
Debt is like any other product in that the sellers are competing with each other to get your business. When looking for a new bank to work with, start with at least three candidates and try to whittle it down to at least two good options to choose from. The more options you have, the more chances of you getting a fair deal.
4. Grow those relationships.
Like any part of business, procuring funding is largely about cultivating good relationships. Banking is one of those relationships that will grow with your business. When you are starting out, it can be all about setting up credit cards, check processing, online tools and maybe a little line of credit.
But, after you get established, it can evolve to include equipment leasing, factoring and more complicated financial tools. Knowing your banker on a first name basis and keeping them updated on your growth is important.
5. Make money.
Obvious, but people often disregard this part. A bank is investing in your company when they give you a loan and their ROI is the interest you are going to pay on it. So, if your company isn't making enough money, the bank will not invest in it.
Remember that the bank does not share your passion and your determination to make your business work (regardless of what their commercials tell you). The decision of whether to give you credit or money will be almost purely based on numbers and those numbers need to go in your favor. So, don't take it personally if your business has little to no profit even though you are growing and your bank is forced to say no.
One of the biggest mistakes at an early stage of our company's growth was not focusing on some less profitable product lines that were easier to sell and would have grown our revenue faster. Another big mistake was giving too much credit for a longer period of time to customers so we could sell more. It disrupted our cash flow and affected our ability to get credit. Your cash flow statement is an indicator to the health of your company, so make sure that flow is strong.
Working with banks is not as daunting as it seems. Just remember that you are shopping for the best deal you can find and they are shopping for the best investment they can find. You have to make your business as attractive to them as they make their lending deals attractive to you.