Essential things to understand about working with a bank

I have had several businesses and worked with many banks over the years. I always tried to see my banker as a business partner. We had the same interests. The bank wanted to see our businesses growing and flourishing because if they were, they would have the use of the cash flowing through our accounts, and they would also have a good lending customer.

Two essential things you have to understand about banks. First, they want to lend you money. That is how they make their money. Their goal is not to reject you.

Secondly, you have to pay them back. Banks cannot afford to take any significant risks because the margin they make on lending money is just too slim. For only a couple percentage points difference between what they charge a customer and what they pay for the money they lend out, they have to cover all of their overhead — including salaries, facilities, insurance, IT, marketing — and make a profit.

There is little to no room for loans that aren’t paid back. For every loan that goes bad, they need 50 to 100 that go right. If you ponder that, it’s not hard to see why banks aren’t in any position to take on much risk.

That brings me to my third point. Banks don’t care much about your business plan, especially when borrowing money from them. They want assets to secure the loan, and they need the income that will allow you to make the payments. And you had better have a great credit score and be ready to personally guarantee any commercial loans you take out — especially early in your business’s life.

It’s also worth noting that banking is a heavily regulated industry. Lenders have little discretion on what they can and can’t do. They do have some control, and it helps to have them wanting to help you. And I have found over many years that a local/regional bank where you can have genuine relationships with the people there is much better than a large national bank where you are just a number.

Because I know the top people running several of our local banks, they have come through when we needed them to do so, more than once.

While I always have a preferred bank I would go to first with any of my needs, it could be wise to do business with more than one bank. Banks get sold, lending officers change, and periodically, banks can find themselves with too many loans, mainly if you are into real estate. A second lending source could be helpful to have.

The important thing is to be sure that you keep any banks you are working with informed about what you are doing with other banks so they have a complete picture of your financial situation.

Lastly, banks don’t like surprises. I learned years ago that regularly sharing your numbers with your banker helps build trust. Keep them informed about how your business is doing, both good and bad. Show you aren’t hiding anything from them, and they will be more likely to help you when you want to either take advantage of an opportunity that has come your way or deal with a crisis of some sort that has reared its ugly head.

Once again, we are fortunate to be here in Northwest Arkansas, where we have an extensive list of great banks. A robust local banking network is crucial to our economy, and without them, we would not be enjoying the boom times we are in today.

Mark Zweig is the founder of two Fayetteville-based Inc. 500/5000 companies. He is also entrepreneur-in-residence teaching entrepreneurship in the Sam M. Walton College of Business at the University of Arkansas, and group chair for the Northwest Arkansas chapter of Vistage International. The opinions expressed are those of the author.