Business Finance: Make Lines, Not Dots
A few years ago a flood hit my hometown of Boulder, Colorado. The flood destroyed homes and businesses across the city. I was working with one business owner who had to shut down and rebuild his entire company from the destruction. It took months before they could operate again.
Unfortunate and unforeseeable situations like this happen. In this instance, the company risked going under if they didn’t either:
- Pull from personal savings (risky), or
- Recruit the help of a bank (highly unlikely)
Fortunately, this business had a longstanding relationship with a local community bank that agreed to push all their payments to the side for a few months. This kept the company afloat while they worked to rebuild.
Key concept: The strong relationship between the business and bank may have saved the company.
That’s why I advise business owners to make lines, not dots. Originally, I got this concept from a post from Mark Suster of Upfront Ventures, which he applied to venture capital. I immediately recognized that his concept spread far wider than just the venture capital space.
Getting Capital Into Your Business
You should never think of financing a company as a one-time transaction. Getting capital into your business is a process that happens through building relationships over time. You need to demonstrate credibility and trustworthiness to the bank consistently, over months and years.
When your business grows and circumstances change, you’ll want to have developed a long timeline of positive reputation interactions with the bank. You cannot rely on a single transaction.
The Common Objection
When I meet with companies, many of them say to me: “I’ve talked to the bank. They’re not willing to give me anything over $50,000 for my business, and since $50,000 isn’t enough for me to do the things I want to do, it’s not worth it.”
They’re right. Maybe 50k won’t get them what they need, but, I argue, if not 50k, where do you plan on starting? You must develop that relationship with the bank. Nurture it, and over time you can turn 50k into 100k into 250k into a million.
Key concept: You can get more capital from a bank as you develop a longstanding relationship with them. Start now, even if it’s small. Start now, even if you may not need the capital today.
One of our clients at AVL worked in the bicycle industry. They were an e-commerce company and manufactured bicycles in China. They also resold a variety of related products: helmets, pedals, tire pumps, seats, etc. They had a positive cash flow cycle because they didn’t need to buy a lot of inventory. As soon as they started building their brand name and selling more bikes, they realized they needed more capital to grow.
When they started talking to their local banker, they had less than $1 million in revenue. Using a proactive relationship-building plan, they increased the size of their credit facility from $50,000 to $750,000 in three years.
That’s over a 10x growth! Yet from a revenue perspective, the business had only grown by 3x. The level of comfort and security between the bank and the business compensated for that disproportionate growth.
This only happened because the banker truly understood the business’s financials. They understood the challenges and knew that the business could overcome these challenges. The banker felt comfortable selling this to the credit committee, and the credit committee saw how the banker really understood the business. Everyone involved felt comfortable with the process. That’s the beauty of it.
How to Start Building A Relationship With Your Bank
Qualitative vs. Quantitative Data
Good relationships aren’t built on tangible numbers alone.
We do accounting and finance at AVL, which means we work extensively with P&L and balance sheets. These tangible numbers play an important role in determining the health of your business. Bankers want to see revenue, profit margin, and positive cash flow, but they also care about the intangible aspects of your business.
- Why are your employees happy?
- Why do you have great customer care?
- Why do your customers choose you versus your competitors?
- How’s customer retention?
- Are you executing on what you say you’re going to do?
- Have you developed a history of executing and achieving the targets you’ve set for the business?
These types of things don’t show up in a P&L or balance sheet, and having conversations with investors or bankers allow you to make that happen. It creates the long-term relationship necessary to plot your upward trajectory, which in turn creates more capital opportunities for your business.
The Do’s & Don’ts of Relationship Building
- DON’T go to your banker in March providing only tax returns and expect that it’s all a numbers calculation.
- DO give your banker feedback. Remember that the goal is to develop a relationship with your banker.
- DON’T think that a once-a-year check-in is enough.
- DO start a quarterly routine of checking-in with your banker. You can keep it simple with a quick phone call or email. Here’s a script:
I want to fill you in on what’s been going on at our company.
We’ve added two key people A and B to the team for the purpose of…
Our revenue plan for the quarter was X and we expect to come in at Y and here’s why …
I want to give you a heads up about _______.
How is everything on the banking side?”
Use these guidelines as a launching pad to create a relationship with your banker:
- What is the core of your business?
- What macroeconomic factors affect your business, both good and bad?
- Are there any cyclical parts of the economy that you need to keep an eye out for?
- Does your banker know your business well enough to refer business to you if the right situation comes up?
If you answered ‘NO’ to that last question, it’s time to start building a relationship.
The more dots you plot on your trajectory, the stronger the line you’ll have. When you plot that line on a graph over time, you should see it moving upwards to the right. And when this happens, risk declines. Trust builds.
Bankers want to see how you stay true to your word. They want to see how you execute. This increases their willingness to loan or invest more money.
Your End Goal: Credibility
Engage in more conversations with bankers. This demonstrates your credibility as an entrepreneur. You’re creating a company trajectory and communicating that trajectory to your investors, creditors, or any other stakeholders in your business.
Too many entrepreneurs underestimate the power of communication, yet it’s this continued and proactive interaction that either makes or breaks a business.
Finally, don’t shy away from taking out a loan or obtaining a line of credit, even if it’s $50,000. Loans strengthen your relationship with the bank and build your credit.