Bankers get bad headlines everyday
But it turns out they're your best friends
The Small Business Association says that half of new businesses survive five years or more, and only one-third make it to the 10-year mark. The threats are real and one need only start and grow a business to face the usual perils: cash shortages, expanding payroll demands, staff turnover, staff investment and training needs, revolving need for supplies.
The challenges may feel ceaseless.
We launched our medical specialty company close to 10 years ago and along the way we’ve earned and enjoyed successes: awards and accolades, growth to eight clinical locations with 55 employees in two states, plus a management services company and retail store.
But like many small, independent companies building from the ground-up, we’ve had our share of difficulties, including a cash crunch, meeting bills, slower-than-planned project timelines and perhaps, most critical – delayed or delinquent Medicaid and commercial insurance reimbursement for services provided. The resultant fear of having to make cuts – the worst being layoffs or termination of valued personnel or abandonment of growth prospects and new facilities – is oppressive to an entrepreneurial spirit.
It is enough to send most people packing. But not entrepreneurs.
The silver lining in this growing pain trajectory is fragile: If you can hang on, the company grows to another level. The wheat from the chaff gets separated, the decision makers get braver and keener in analytical acumen and the business owner builds a team so they aren’t alone.
Nurturing close relationships with two types of banks (a strong local bank and a large national bank) is a “seared-into-our-soul” lesson we've reaped from the last decade. The reasons are profound: The best banks help guide and mentor a growing business, while managing and mentoring a business on economic principles. Those principles, when wisely employed, protect and grow a business.
A key principal is knowing when to borrow money and/or utilize credit for business growth and profitability. It’s rare that a company is cash fluid enough to meet daily operational needs, ensure a healthy savings of “cash on hand,” and invest in future growth.
Here are some lessons we learned by doing. There is no textbook for a startup, each is unique in its trajectory. Likewise, there is no practice round or academic coursework that prepares a business owner for the ups-and-downs of management. Just because you are an expert in your industry, doesn’t make you an expert at running the business that sells your product. The right bankers and excellent money relationships can make entrepreneurs experts at both.
Our first form of borrowing was using credit cards. We were able to buy supplies and avoid paying for an additional 30 days, plus build “points,” “miles” or “rebates,” depending on the card. The downside is we ended up with a large bill at the end of the month and big interest fees if we couldn’t pay it. We only use credit cards now for certain supplies and travel so that we can better estimate the monthly burden.
Lines of Credit:
Our local bank is our most important relationship. We have a revolving line of credit for routine needs and we have an excellent record of paying on it. We’ve also opened and closed short-term lines of credit that were extended for critical gaps and quickly repaid when the money came in. This helped in a crisis or when a great opportunity presents itself. Our bank is well aware of the health care system’s reliance on reimbursement, so we keep them apprised of delays and accounts receivable.
When we have longer-term financial needs like a real estate purchase or build-out of a new medical space, we’ve turned to permanent loans. Longer-term loans typically have low interest rates but will be a line item on your financial statements for quite a while. You may need to shop around and create relationships with larger/national banks for bigger and more standard loans. These loans can have zero money down options, down payment options, and up-front payment options. They may also include balloon payments, seasonal payment streams, skipped payments, and deferred payments.
If cash is short and a continuing issue, there are other options to consider (and a good banker can fully explain the ins and outs):
- Online lending
- $1 Purchase Option
- True Lease or FMV Lease
- Factoring Programs
- Angel investors
- Venture capitalists
- Employee Stock Ownership Plan (instant cash with your employees investing their own money into the company).
There are also ways of “making money by saving money.” This is not as pleasant and may affect staff moral and productivity. You have to weigh the consequences:
- Turn your employees into consultants and hire them out to other businesses for periods of time.
- Sell “byproducts” for cash. You may create products that have value without (specialized documents or forms for example) that could have value to other, similar business who don’t have time or money to create them.
- Allow co-working and lease out desk space to employees of other companies if you have extra space in your office.
Rent out conference rooms or sublease space out on weekends.
In the extreme:
- Cutting owner salaries/distributions
- Pay freeze or pay cuts
- Withhold bonus payouts
- Eliminate outsourced services and consultants
- Shorten the work week
Business finance is not a mystery but it can be difficult to discuss. Cash flow keeps the doors open and allows every business to provide their best service. Great banking relationships make that possible in the best possible ways.