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Establishing a Bank Funding Relationship: Small Business Loans and Services

  • How to develop a relationship with your bank to meet your small business needs
  • The important documents to bring when meeting with a bank representative
  • What banks are looking for to gauge creditworthiness

By Denis Jakuc

Establishing a relationship with a bank or credit union is very important for a small business. In addition to loan funds, a bank can also provide valuable services to small companies, such as working capital line, payroll, 401(k) retirement plans, health savings accounts (HSAs), credit cards, and other services. Your business banker can also be a useful source of advice and counsel about the financial aspects of running your business.

Bankers are financial professionals. They appreciate your business, and when they grant you a line of credit or loan their advice will be thoughtfully offered, since they have “skin in the game.”

Banks come in three sizes

You can work with a local bank with one or more offices in the state. Or you can choose a regional bank with offices that serve a multi-state area. Or you can work with a national bank that has offices in most of the country. In all cases, you’ll probably work with one or two bankers in a single office convenient to your place of business.

There are pros and cons to each bank size. Your business is important to a local bank, so you can expect attentive service. Local banks are typically more responsive, since they have fewer layers in the decision-making process. Local banks also often stage educational events where you can learn more about matters relating to financing your business.

However, larger regional and national banks may offer a broader range of services than local banks. Meet with different sized institutions and compare their services, and the rates and terms of their financing options. As with any funding source, check with other small businesses that work with them.

Key bank funding products include:

  • A business line of credit or working capital you can draw on to cover short-term needs. This can be vital to seasonal businesses that have to cover ongoing expenses when income is down, and to any businesses faced with emergency expenses
  • Term loans to be repaid with interest on a fixed schedule
  • Equipment loans to pay for machinery and office equipment
  • Commercial mortgages to purchase buildings or land.

When meeting with a bank or credit union, come prepared. Some things to bring include:

  • Credit report
  • Business plan, including funds needed and expected results
  • Bank statements
  • Tax returns
  • Income statement
  • Balance sheet
  • Budget and projected cash flow
  • Documentation for the value of collateral (if needed)—e.g., property appraisals

Banks are most impressed with audited financial statements by an established CPA firm.

SBA lenders

It’s smart to choose a bank that’s also an approved lender with the U.S. Small Business Administration. The SBA guarantees loans provided through banks and credit unions at attractive rates and terms. These include:

  • SBA 7(a) loans of up to $5 million for working capital, debt refinancing, or inventory
  • SBA 504 loans up to $5 million for large purchases, such as land or buildings; new construction, equipment and machinery; or for the improvement of existing facilities
  • SBA Microloans up to $50,000 for working capital, inventory, and equipment

What banks care about

Banks and credit unions gauge your creditworthiness by looking at the five Cs of credit:

  • Character: the credit history of your business
  • Capacity: your business’s debt-to-income ratio—the higher it is, the higher the risk
  • Capital: your personal investment, the firm’s retained earnings, and other assets
  • Collateral: assets pledged as security for the loan; these can include personal assets
  • Conditions: loan amount, payment period, and interest rate; economic conditions may also be considered, such as the strength or weakness of the overall economy

Banks also look at these key financial ratios:

  • Debt-to-Equity Ratio: Compares your company’s debts with its assets (equipment, inventory, net receivables, buildings); the higher it is, the higher the risk
  • Operating Margin: Your company’s profit as a percentage of total sales
  • Current Ratio: All current assets divided by all current liabilities; a high ratio is good
  • Inventory Turnover: The rate that stock is sold and replaced; calculated by dividing cost of goods by average inventory for the same period of time; higher is better

When selecting a bank or credit union, carefully forecast your cash needs and timing and choose an institution that can meet those needs. Check rates, services, and references, and consider how you will dispose of the loan if you plan to raise money through an equity offering. Approach hiring a bank or credit union as if you were bringing on a financial partner, because that’s what you’re doing.

Note: For more detail on how to interview the banks you’re considering, read the Expert Summary, “Questions to Ask When Selecting a Bank.”


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