Bank on it

A few things to consider as you look for your next phase of financing

So you’ve made it through those torrid first few quarters, stretching your start-up capital as far as it could go. Your young business has customers and you’re looking to build a team to help you reach your next set of goals.

It’s time to call the bank.

So as you update your strategic plan, your benchmarks and your pitch, keep in mind some of the priorities guiding those you’ll be pitching. First off, remember that the banker across the table isn’t putting his or her institution’s money to work based primarily on the business you’re building. That cash is a bet on you, the entrepreneur, and your experience and personal relationships will often make a big difference.

Steve Uebelhor, senior vice president at Pinnacle Financial Partners, says he finds himself most impressed by entrepreneurs who have built or turned around companies in a range of industries.

“That shows us the person has a broader understanding of how business works,” Uebelhor says. “As bankers, we don’t know the industry as well as the entrepreneur. In the end, we’re still looking at cash flow and leverage.”

Lenders also are looking at the bigger picture. Rick Archer, Nashville market president for Legends Bank, says your banker can keep a watchful eye on your industry and the broader economy and then help you respond quickly if dark clouds appear on the horizon. During the Great Recession, Archer says, companies that took action early on were much more able to weather the storm.

“Good organizations do a better job of being agents of change,” he says.

As your venture does ride those waves of change, bear in mind the forecasts you made to the bank. Staying on track with those projections will be a big help if you go back with new requests. A track record of stable growth — especially if your loan is not fully secured — is crucial, but keep in mind there is rarely a hard-and-fast formula that bankers use to make their decisions.

One thing that is vital is cash flow. It is the primary source of repayment bankers look to, whereas entrepreneurs often will look to other metrics such as asset values or letters of credit from equity investors.

“An entrepreneur by his nature sees the company through the lens of those secondary sources of repayment,” Uebelhor says. “The lender is closer to point A, the primary source of cash. In the end, it’s often all about the stability of cash flows and the leverage you put on them.”

And for bankers, it’s also about having a way out should your fortunes go south. It’s a really good idea, Archer says, to model a worst-case-scenario budget – because your lender is thinking about just such a situation.

“That’s why we want to see the history, why we want to know who your customers are and why we ask the extra question,” Archer says. “Basically, we have to have an exit strategy and be responsible both to the bank’s shareholders and to the rest of our customer base.”

Good advice, too, for those not in banking.


Steve Uebelhor’s top tips for become a bankable entrepreneur

• Surround yourself with the brightest advisors you can find early on. You can’t anticipate all the questions you’ll need to answer. Then, as you grow, hire the best management team you can find.

• Think early on about how your capital structure will develop over time and build it out over a business cycle. Don’t overly lever yourself.

• Invest in strong financial controls early on and know in detail where you stand with your important metrics, even if you have a good CFO. It’s a learnable skill every entrepreneur should spend time developing.