Key to growth: A relationship with your lender

It isn’t a secret – Colorado’s economy is vibrant and strong.

New developments continue to spring up across the state, many entrepreneurs have started new businesses, and many more companies are growing and need resources to meet their increased demand.

What’s the secret to ensure business owners successfully meet their funding needs?

It’s actually pretty basic. There are three key elements business owners need to consider in order to smartly grow their businesses with lender support.  Successful owners build strong relationships with their bankers, surround themselves with trusted advisors, and take the initiative to plan their growth.  In short, successful businesses don’t just wing it – they plan for and meet their funding needs in a purposeful manner.

Be Proactive and Build Relationships

Business owners often miss the opportunity to strengthen their banking relationships during quieter, stagnant periods of operations.

If CEOs and their management teams only visit their bank when credit lines are maxed out or other critical lending needs arise, they create unnecessary stress for themselves and increase the likelihood of a “no” or “maybe” answer from the bank, instead of the positive outcome everyone desires. Last minute lending requests certainly arise and are justified occasionally, but businesses run the increased risk of being turned down if they commonly approach the bank this way.

Businesses need to be proactive and stay in frequent contact with their bankers.  It cannot be overemphasized that fostering strong and enduring relationships in good times and bad results in long lasting and fruitful banking relationships that grow over time.  Bankers actually enjoy hearing from their clients on a regular basis.  Staying in regular contact with your lender enables you to engage the bank in an ongoing and meaningful dialogue about the progress and pitfalls of your business, which in turn, enables them to go to bat for you when you need it the most.

Surround Yourself With Trusted Advisors

Good bankers are no longer viewed as order takers.  Smart business owners look to their lending partners as trusted advisors who often become reliable sounding boards in sharing their growth and other strategic plans.

Since it’s lonely at the top, successful business owners also need to identify key individuals, both within their organizations and externally, who can offer constructive advice. Internally, the controller or CFO often fills this role most effectively.  Externally, CPAs, attorneys, financial advisors, and the like provide unmatched advice to business owners. Business peer mentoring groups like Vistage and CEO Focus also serve as excellent informal “boards of directors.” The key to success in this regard is to seek out advice regularly and not wait until a crisis occurs – then act immediately on the initiatives that make the most sense.

Take the Initiative to Plan and Forecast

Businesses that grow without adequate planning run a much greater risk of going out of business.  Non-strategic growth is cash flow’s worst enemy. 

During growth cycles, management tends to focus on completing daily tasks like filling sales orders and keeping the pipeline full, rather than planning on how to fund that growth. Herein lies a challenge faced by many entrepreneurs: when focused too heavily on growth and day-to-day tasks, not enough time is spent on critical analysis of the business and planning for financial needs, oftentimes resulting in limited cash flow.

Banks love clients who are thoughtful and strategic in the way they grow their business and are more inclined to go the extra mile in assisting clients who have made a concerted effort to plan for the future. The “wait and see what happens” approach is far less appealing to funders.

Good bankers truly desire to understand and help you meet your growth objectives.  When presenting a loan request, be prepared to share not just your plan to grow the business, but how the bank’s support will help you succeed.  Include specific measures and outline the resources you need to meet your planned growth, such as people, equipment, facilities and working capital. This process should not only justify the loan request, but also provide a specific plan to repay the debt.

With all of this in mind, any business interested in a loan should provide their bank with short-term cash flow projections (30 to 90 days), along with longer-term profit and loss projections (1-2 years out).  This process is critical for three reasons:  1) It brings focus to how the business owner intends to fund growth; 2) It is enormously beneficial as a general planning tool for management; and 3) It gives the bank more confidence in the business owner’s ability to execute a growth plan successfully (not to mention the increased likelihood the debt will be repaid).

Preparing financial and cash flow projections can be daunting, but there are many good and relatively simple models that can be obtained from one’s group of trusted advisors to assist in this effort.  The key is to be honest and realistic in conveying information to the bank and remembering not to be afraid to ask for help.

The Bottom Line

Every lending institution essentially follows the Five C’s of Credit when approving or denying loan requests – Character, Capacity/Cash Flow, Capital, Collateral, and Conditions. It is therefore important for businesses to build strong relationships with their bankers, rely on a network of trusted advisors, and be proactive in planning for their future – all while communicating openly and honestly with their trusted bankers.

(This sponsored content was supplied by Centennial Bank.)