When Leonard Wolf approached a bank to finance his seasonal candy-cane business, he was startled when the loan was approved almost immediately. His son Stevan, a stockholder in the candy factory located in Westville, New Jersey, solved the mystery: Stevan's wife taught school with the loan officer's wife. "Since the officer knew our family and felt we were trustworthy, it really speeded things up," he says.
In the delicate business of obtaining a bank loan, the personal touch matters. To be sure, small businesses applying for loans must be able to show three years of sound financial statements and a sophisticated business plan, spelling out how the money will be spent and repaid. But in the end, a banker makes a subjective decision about whether an entrepreneur is likely to repay a loan. "Banking is an art as well as a science," notes Kwasi Holman, senior vice-president and manager of the small business department of National Bank of Washington in Washington, D.C.
Traditionally, big banks would not bother with small businesses. They went after big multinational clients. But as large companies increasingly turn to Wall Street for their financing, "more and more banks are recognizing that the small business market has great potential," says Arthur Thompson, senior vice-president of National Westminster Bank USA in New York City. Though smaller businesses tend to be steady, loyal customers, banks may ask small family companies to show that they are professionally managed. In two-generation situations, where a son or daughter has a business degree and has different ideas from the owner's, the banker will try to maintain relationships with both father and child, to make sure there's a smooth transition down the road.
Cultivating a relationship with an institution is time-consuming. But the effort can ensure that a business will get the help it needs to grow and to survive economic downturns. When looking for a loan, you should begin by shopping carefully. You will be able to eliminate some institutions from consideration quickly. Banks vary considerably in the kind of business they seek. Some will only deal with businesses of a certain minimum size. Some avoid particular industries, and others cater to certain markets. National Bank of Washington's small business department, for example, specializes in making loans to computer software companies. You can find out what kind of business a bank seeks by asking a loan officer. Though bank officers may not reveal specific lending policies, they will gladly provide general guidelines.
There are a variety of ways to approach a banker. It may be easy to begin conversations by talking to bankers informally at Chamber of Commerce meetings or other events. An introduction from an accountant may help win the attention of a sympathetic loan officer. Cold phone calls can also start the process. Lending officers will make appointments to talk to potential customers.
Eve Slap, who operates a Ford dealership with her brother in Kennett Square, Pennsylvania, needs to borrow frequently to purchase cars. She chose a banker after meeting with several whom she invited to visit her dealership. Over lunches and other meetings, she attempted to cement a relationship. "You need to find someone who feels comfortable with you and your business," she says.
In her conversations she sought to persuade the bankers that the dealership was a solid and growing operation. At the same time, Slap sized up the bankers, trying to determine who understood her business and who would be willing to stand behind an operation that would inevitably face periodic industry slumps.
She asked officers what positions they held and whether they had been promoted recently. Such questions were not idle conversation. Higher ranking officers can make larger loans without consulting superiors. An officer with more clout in the institution can provide more service. "You want to deal with someone who is moving up," Slap advises.
Some entrepreneurs are convinced they should do business with only one bank. In this school of thought, the banker becomes a confessor and advisor who knows everything about the business. Emotionally committed to the business, the banker is more likely to offer favorable terms and stand by a company during hard times.
But other entrepreneurs constantly shop, looking for the best arrangements available. Stevan Wolf, the candy maker, keeps open lines to a number of institutions. Many banks will only give loans to businesses that keep deposits, so Wolf keeps accounts at three different banks. At each, he maintains a reputation as a welcome customer, getting to know the tellers and officers. When he needs a loan, Wolf can approach several banks and encourage friendly competition. If a bank knows a competitor has offered a loan at a particular rate, it may be willing to provide a more attractive package.
Even businesses that maintain one primary bank can occasionally allow other bankers to bid on special projects. When Eve Slap needed to borrow $1 million to finance a new outlet, she solicited bids from her long-time bank, as well as from others. Her bank ended up matching a lower, outside bid, winning the account and saving Slap money. Such bidding contests may help keep a bank on its toes.
The bank's biggest and best customers generally borrow at the current prime interest rate, while smaller companies often have to pay a point or two plus prime for working capital, and three points plus prime for equipment financing. However, businesses should not simply shop for rates. Small business owners should seek bankers who can offer creative financing solutions and prompt service. "The most important thing may be to find somebody who will take your calls," says John Cherin, a partner at Arthur Andersen.
When John Vander Ploeg and his wife began their packaging-materials and equipment distribution business 25 years ago in a storefront in Kalamazoo, Michigan, they needed to borrow $18,000. They convinced a banker to lend it to them, using their receivables as collateral. Every month for two years, the Vander Ploegs had to show the bank records of their incoming cash. Today they have 65 employees. While the firm's borrowing needs have changed, John Vander Ploeg says his philosophy of seeking loans has not changed. "The only way to handle a banker is by being totally honest," he says. "If you don't tell him the bad news, he will almost certainly find it out from another source."
—S.L.