A banker’s advice on what small businesses start-ups need to consider

You are ready to launch your new business. On your checklist you have:

Great new business idea. Check.

Solid business plan. Check.

Support of family and friends. Check.

Sufficient capital to launch the business. Check.

Strong group of employees. Check

Strong relationship with a bank. Oops. No check.

It often happens that fledging enterprises begin without a strong relationship with a bank. The new business may have nothing more than a checking account with a local financial institution.

This was the case with my small business.

This is a mistake.

A strong banking relationship is as important as the other items on your checklist.

I recently spoke with Michael Swanson at Coastal Community Bank to get his perspective on how entrepreneurs should build a solid relationship with a bank. Swanson is a vice president and manager of Coastal Express, the bank’s streamlined small business lending department.

Here are the highlights of our conversation:

Question: How do you begin to develop a relationship with a bank if you don’t already have one?

Swanson: First of all, find a bank that specializes in business banking. Although banking has become fairly standardized, you will still find that banks specialize in different types of lending. Next, you’ll want to find a bank where the employees are empowered to actually help their customers. It makes no sense to establish a relationship with a banker that has to pick up the phone and call out of state every time he needs to make a change on your account.

Relationships take time to build. Meet with a banker today. Tell the banker about your business and what you hope to accomplish as a good conversational starting point.

Q: How much funding do I need to have? How much funding should I expect from the bank?

Swanson: For new businesses, 25 percent would be a good starting place estimate, but there are situations where it could be as low as 10 percent or as high as 40 percent depending on what is being financed and other credit factors. This would be a good question to ask that business banker.

Q: Would you advise me to take out a line of credit against my home to provide initial capital for the business?

Swanson: It really depends on the level of risk you’re willing to take. Offering a deed of trust on your personal residence could provide favorable terms, but you are also risking most individuals’ greatest asset. It’s a risk versus reward decision. Banks would prefer to look within the business for collateral. Many seasoned businesses have sufficient assets to fully collateralize loan requests. For startups, this can be a challenge because they have not had enough time to accumulate assets. That’s where Small Business Administration loans can come into play. The government provides a guarantee that can help mitigate concerns the bank may have about collateral.

Q: What are the top two or three things you look for in a business plan?

Swanson: I ask myself the following questions: 1. Do the projections make sense? Can they be supported by the principal’s past business endeavors and/or market data? If you think you’ll be able to sell $100,000 worth of widgets, be prepared to tell your banker how you came up with the figure. 2. Does the principal have the experience necessary to execute the plan? A business plan doesn’t mean much if the principal does not have the professional experience and/or licenses and certifications to demonstrate that they will be able to implement the plan. 3. What sort of contingency plans has the business owner made in case “Plan A” does not pencil out? Business plans are valuable, not only as an effective way to communicate a vision, but also because they force the entrepreneur to think about all aspects of the business before fully diving in.

Q: What’s the most common mistake you see in business start-ups? What’s your best advice for new entrepreneurs?

Swanson: Failure to adequately plan is the biggest mistake start-ups make. It’s been said numerous times throughout history, but “failing to plan is planning to fail.”

The best advice I can give a new entrepreneur is to find a mentor. Most of the seasoned entrepreneurs I know aren’t shy about sharing their opinions and would be more than happy to share advice with those just starting off. If you cannot find a mentor, contact SCORE (www.score.org) and they’ll help find a mentor with experience in your field. Also, Economic Alliance Snohomish County (www.economicalliancesc.org) has resources available on their website and offers seminars on a variety of business topics.

Pat Sisneros is the vice president of College Services at Everett Community College. Send your comments to entrepreneurship@everettcc.edu.

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