By Marc Monahan
With spring at hand, now is a great time to start thinking about new opportunities. As entrepreneurs think about starting or growing their businesses, often the first task that needs to be addressed is funding—whether it’s for new office space, investment in equipment, operating cash, payroll, marketing, or any other aspect of running a business.
Here is some guidance:
1. Use the area’s great resources for entrepreneurs. Banks work closely with and refer many small business customers to work with economic development corporations in the Saratoga region, including the New York Business Development Corp., Empire State Certified Development Corp., and SCORE.
Even before an individual goes to a bank to discuss a request for startup financing, these offices can offer entrepreneurs and current business owners guidance on alternative financing sources, grant funding, site selection and drafting business start-up plans.
2. Develop a thorough business plan. Because new businesses don’t have the benefit of actual financial performance to demonstrate the potential for future success, it is important to have a business plan to guide conversations with bankers. A three- to five-year plan with information on the business owner’s experience, personal financial information, anticipated business expenses and rationale to explain expectations for earning revenue is recommended.
This plan should also demonstrate the business owner’s understanding of both the proposed product and the market, as well as how he or she plans to take advantage of any trends or untapped opportunities.
3. Be prepared to spend time with the bank, so that they can really understand your business. This allows them to provide the best recommendations and products to help the business be successful in the long-term.
4. Ask about Small Business Administration (SBA) resources, and even USDA resources. As an SBA Preferred Lender, NBT Bank provides a streamlined review and approval process for a variety of government-sponsored loan programs for new businesses or existing businesses that may not qualify for a conventional bank loan.
5. You typically need to contribute some of your own money (project equity) in order to secure bank financing. Banks generally do not finance the entire operations of a business, so startup companies should plan to raise capital or invest their own money for at least 20 percent of startup costs such as equipment purchases, fit up of the facility, and the projected cash flow needed to cover operations until the business becomes cash flow positive.
This capital infusion may be used to cover operating expenses, but is often used as the down payment on physical asset purchases. The trick is to find the right balance between debt (the bank loan) and equity (the owner’s capital). The more capital that an entrepreneur can raise or contribute, the better it will look to the bank that is reviewing the application for financing.
6. And one of the most important things that an individual can do when preparing to ask for financing is take time to build his or her credit profile by staying on top of any existing loan payments, while saving as much money as possible for the personal investment in the business.
These tips should help an entrepreneur get the most out of their discussions with their banker, but this is certainly not intended to replace that discussion. It is important that the entire banking team, from loan officers to financial planners, get to know the individual and their organization, including where the company is in the business life cycle and what their overall industry looks like now, as well as trends for the future.
This allows the bank to not only support a company’s operations, but also the business leader’s aspirations.
This is similar to how a professional mentor might be identified for you and your business, and how that relationship forms. It’s not overnight, but rather it takes time to get to know each other.
The stage, industry and location of each individual business determines which of the local agencies are the best fit. It is truly a collaborative approach to assist customers in getting financing to meet their growth needs. Like a mentor, through the financing process, you should feel confident that someone has your best interests in mind, as well as knowledgeable and relevant advice to offer you.
This relationship is equally important after a business has been operating for several years, especially when the business owner starts thinking about growth. When the customer and the bank have an existing relationship, the bank is already aware of how the business has been performing and its cash flow cycle.
Financing requests for growth initiatives often have the benefit of citing the proven financial performance of the business, and sometimes have assets to leverage for the requested funding. If a longer-term relationship has not yet been established between the business owner and the bank, then the business owner should be prepared to proactively explain why a past year may have been unusually successful or unsuccessful.
One of the most noticeable ways that a bank is able to create this type of personal relationship is by employing experienced bankers who have years of living and working in the area of their customers.
Proper planning now for a minimum of the first two years of operation of a new business is critical to best manage the financial success of a startup, from the loan payment structure to being able to invest in growth.
The same approach to long-term planning is important for existing businesses that are looking to invest in growth efforts. And whether you have been in business for several years or just completed your first quarter, it’s always important take some time to review your business’s financial needs and options.
Every organization’s situation is different. That’s why it is essential to work with a banking team that understands your business. By connecting with these types of commercial banking specialists, business owners will benefit from an experienced and dedicated team that can help to identify the most useful bank products and services.
Monahan, vice president of commercial banking, is based at NBT Bank’s Regional Office in Glens Falls.