Can you bank on your banker?

Entrepreneurs need to know how to go to the bank and when

By Howard Johnson’s own count, about 10 banks turned down his start-up company TSCM Security Services LLC for a line of credit between 2008 and 2010.

Even after winning a $10 million contract from the Federal Emergency Management Agency in 2009, the founder and CEO still could not get funding because TSCM had not been in business long enough to be considered a good risk.

“They all said, ‘You’re doing okay but you’re not mature enough,’” Johnson said. “I was still not at that five-year mark” that many banks have set as the minimum time needed to qualify for funding.

CFO Don Brazelton recalled that even the large bank that handled TSCM’s money and payroll turned down the Capitol Heights, Md., company.

Finally, in September 2010, First Virginia Community Bank officials said yes. “They looked at my financials and saw that I was being paid regularly, everything was up to date, and what they did was give me a chance,” he said.

That chance was a $500,000 line of credit that allowed the 8(a) certified, minority-owned, service-disabled, veteran-owned small business to grow from nine employees to its present 27 and take on new clients including the Defense and Homeland Security departments and the National Security Agency.

Lending institutions “come in all shapes and sizes and they all have different market niches that they serve,” so finding the right bank is difficult, said Michael Clarke, president and CEO of Access National Bank, a community bank in Reston, Va.

“It can be particularly frustrating for a start-up company to get a productive banking relationship off the ground because the fatality rate of start-ups in general is very high,” he said.

“Quite frankly, most banks will lose money on a $50,000 loan,” Clarke said. “They’re not making the loan because it’s going to be a wildly profitable venture. They’re making that loan in order to develop a relationship and help a business that might become a $5 million business one day,” he said.

Kevin DeSanto, managing director at investment bank KippsDeSanto, concurred. “During the first couple of years it’s difficult to get bank financing because you don’t have a track record of performance and very few contracts against which folks are going to be able to lend,” he said, adding that there are alternative financing methods including

“There are other forms of financing where people can essentially factor their accounts receivable and get higher interest or higher cost debt financing in those early stages,” DeSanto said.

Adam Ostrach, Capital One Bank’s market executive for the Mid-Atlantic region, advises government contracting entrepreneurs to look for a bank that understands and has a history in that sector, especially when they’re seeking investment bank assistance.

“You tend to go to an investment banker for a couple of things: You’re looking for capital or you’re looking to sell your company,” said John Hurley, senior executive in the Venture Pipeline Group at law firm DLA Piper.

In most cases, new companies are looking to an investment bank for early-stage funding, and they need to know what to expect, including their fees and charges, Hurley said.

“For example, they may [require] a minimum $10,000 a month retainer. And then typically there’s a fee, say 4 percent to 6 percent or so, to raise the capital,’ he said.

So investment banks usually will want to raise $5 million to $10 million to make it worth their time and attention, Hurley added.

Such fees and charges add up quickly and need to be factored in up front.

“You don’t want the 800-pound gorilla firm to come in and have to pay them a lot of money when you don’t really need them yet,” Hurley said. “You can pay a much smaller firm which is more rate friendly to a startup company.”

Clarke said, “I believe that small banks are more helpful and effective with small companies. They tend to have less rigid policies when it comes to working with start-ups.”

But when companies are seeking equity capital or a buyer, “a firm like ours makes money is when transactions get completed,” DeSanto said.

“Our job is to function as a strategic adviser to them and to help them orchestrate a process that is going to yield an acquisition by them or of them, or an investment in the business that they are owning and operating,” he said.

DeSanto said investment banks like his want new companies to seek banking counsel early in their lifecycle so they can make decisions with the bigger picture of the end game in mind.

“When they get [to us], it’s typically a conversation that revolves around what the value of the business is and what it takes to increase that business value, how long it’s going to take and the steps needed to get there.

No matter the reason, bankers agree that finding the right lending institution requires lots of leg work and a good deal of due diligence,.

One of the worst ways is to simply pop into a retail bank center, Clarke said because “It would probably not be very effective.”

He advises seeking out industry organizations such as local chambers of commerce, the Northern Virginia Technology Council, the American Small Business Council and other professional groups whose members often include both government IT companies and banking institutions.

“Accounting firms are a great window into banks. They often help companies find their banks, through their accountants or through their attorneys,” Ostrach said.

Clarke, of Access National Bank', suggested that insurance professionals “probably have good contacts and resources also” because they often are plugged in to bankers and other lending organizations.

If you’re new to the area and standing up a new company, Hurley advises querying other companies in the same space, your legal team, even the bank where you do your personal checking.

And newcomers to the industry especially should consider finding “the gray hairs, [those] who’ve been in the market for enough time, enough cycles to understand how to grow and have the battle scars to really help,” he said.

And when you think you’ve found the right fit, ask yourself “Does that provider have expertise within the sector that I am in? Does he or she deal with companies of my size? And can I grow with them?” Hurley said.

Entrepreneurs should go to their prospective bank – commercial or investment – prepared to make a presentation that answers the required information, which often can be found on the bank’s website.

At the least, entrepreneurs should come with an executive summary or narrative that articulates where their company is in terms of its growth, where it fits in the marketplace, its go-to-market strategy, and what differentiates the company from its competitors, Hurley said.

Bankers also will want to see the company’s government contracts if they have any, Clarke said. Also, details about the type of loan being sought – a revolving line of credit, a letter or credit or a term loan – also the loan category, such as a tax exempt or SBA loan; and the purpose of the funding.

The bank will examine the company’s complete finances, cash flow projections and each owner’s personal financial position.

Ostrach said, “Three years of financial statements or three years of tax returns is usually a standard requirement of banks.”

“The younger the business, the more of a startup [it is], the more important the personal financial data is, especially the credit of the owners,” Clarke said.

Clark said it’s important to bankers that the owners have a financial stake in the business, but not to the point that they deplete their personal savings.

Too many business owners make the mistake of over-investing in their business before they go to the bank, Clarke said. They lean too heavily into their personal credit, even maxing out their credit cards or home equity loans and then they have personal credit score problems.

“They really need to get a line of credit for the business long before any of that happens,” Clarke said. “That should never happen.”

The newer the company, the more the bank’s focus will be on its management team. “You need to have the right team in place because you’re really betting on their execution ability,” Hurley said.

Capital One’s Ostrach advises bringing the leadership team, if its small, to the bank so they all can discuss the company’s assets and business strategy. But, he added, it’s not necessary to reveal any proprietary technology information.

Banks need “to understand the big picture, what the company has to offer in their contracts, but they don’t need to get into the weeds on the specific of the technology. We’re finance people, we’re not technology people,” he said.

Finally, it’s important for finance seekers to realize that the process and the information that they need to present must be comprehensive, no matter how much money they are seeking.

“For us," Clarke said, “that list is the same whether it’s for $50,000, $500,000 or $5 million.”

Reader Comments

Tue, May 15, 2012 RBHall

The problem occurred when bankers were anointed as the conservator's of our western way of live!

Tue, May 15, 2012 Foster

I am an accountant and spent 5 years in commercial banking. 99% of the bankers i met, and continue to work with today, have no undertsanding of financial statements past profit, debt service coverage, and assets available for collateral. They also have no understanding of contracts. they will also not tell a potential client UP FRONT that there is no way their bank will finance them even when they know the conditions which thier bank will or will not lend. My advice to business owners...ask blunt questions up frant using the true reality, no matter how unattractive, your company represents.

Mon, May 14, 2012 Mariano Tellarini www.masthink.com

In my experience, if you position yourself to deliver a tsunami-proofed business proposition, getting financing should be the logical way to go for your Bank. In terms of risk-benefits, the safest bet. There is a whole world to conquer prior to that, though:
1) Make sure you are knocking on the door of the right Banker. This is critical because you are not the only one that needs to understand (and value) the market you are in. 2) Perfect your ability to convey “the story” (where are you going with your business? How this deal will get you closer to that place. This doesn't need to be a cryptic, technology debate but more a story-telling, visionary initiative). The worse thing that could happen is to have holes in your story that pop up like pop corn during your face to face negotiations, delivering a fatal wound to your aspirations.
3) Offer comprehensive financial modeling analysis to backup and support the viability of “the story”
4) Align reputable partners (OEMs, team members) to add credibility to “the story”. True strategic Partners should even agree to share with your financier some of your credit risk.
5) Meticulously plan for the unavoidable “collateral” conversation.
6) Think of your financing partner as a circumstantial member of your board of directors or leadership team and act consequently: Deliver qualitative, comprehensive information to them.
Depending on the size of the opportunity, failing at it will most likely mean the end of your small business. Banks know that you have one shot at it (as they have theirs to recover their investment). That being said, although it is key to show you have a path to success, it is also important to show your unconditional commitment to follow that path.

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