Relationship Banking: The Business Owner Benefits
Why It Pays to Build Rapport with a Private Banker
- Credit & Lending
It's a good time to be a business owner — especially if you're seeking access to short-term capital. With rapid growth in the fintech sector, there's no shortage of on-demand capital for your business. However, there's a catch. While companies such as Square, OnDeck and Paypal Capital tout their loose online application process and quick access to cash, the short-term loans they offer often come with hefty fees and high interest rates.
In many respects, using a fintech company is the exact opposite of relationship banking. Online lenders don't need to rely on the existence of a relationship with the borrower, beyond their ability to use their platform and qualify for a loan. And given their focus on volume, they often cannot develop a complete understanding of the borrower's financial situation and, consequently, often cannot issue customized debt products. As a result, borrowers can end up with an expensive debt facility that's ill-suited to their needs.
Bob Babine, Partner and Certified Public Accountant (CPA) with Edelstein & Co., noted that these debt products can create a strain on cash flow, which can often lead people to re-up on these loans. This compounds loan sizes and results in reduced deposits from point of sale transactions and an overall higher cost of capital.
"When they re-up on the loan, they pay an additional fee and sometimes they don't get the full amount," Babine said. "For example, if you already have a loan balance of $25,000 and you request a loan of $50,000, some lenders just deposit an additional $25,000 and charge a full fee — or slightly less — extending out the amortization period and potentially increasing the factor rate and lower deposits received from credit card sales."
Personal Relationships Still Matter
While privately held business owners have many loan providers to consider, when it comes to borrowing from a traditional lender, relationship banking still matters. Yet these associations take time to build and nurture. Business owners without a connection with their banker often find themselves running out of time and are forced to use the quickest financing options available, which in today's marketplace means borrowing from a costly fintech company.
To avoid this, it makes sense to engage a CPA to prepare a budget detailing the firm's future cash needs long before a company needs access to capital. Having a skilled CPA available to conduct an analysis and answer a bank's questions can play a critical role in helping a borrower secure funding. For example, if a business operates a manufacturing facility:
- Does it have enough cash for inventory purchases to expand sales?
- Is there enough cash to manage seasonality trends?
- Can it cover short-term obligations while investing in other areas of the business?
- Does it have enough cash to support large increases in inventory or a temporary shutdown while transitioning to a new space?
With the luxury of time, a CPA can run a multitude of scenarios to test assumptions about the future of the business and arrive at the most financially compelling options to pursue.
Next, when there's no immediate pressure to approve a pending loan application, scheduling a meeting between the CPA, business owner and their banker to review the forecasts helps educate the bank on the business and its needs.
"Having regular face-to-face meetings with your banker helps to build trust," David Donahue, a Vice President and Commercial Loan Officer with Boston Private, said. "It is critical that a banker understands a business's growth strategy, and that a business owner has confidence that the bank can help execute that plan when the time comes. That includes having a banker and CPA that aren't afraid to say that you're taking on too much debt or the strategy is too aggressive."
In addition to building rapport between the business owner and the bank, having a meeting also builds trust between the CPA and the lender. Afterward, it may make sense to schedule a follow-up for the banker to visit the company's facilities and review its financial records.
"Beyond having a strong relationship, it's crucial that you work with professionals that have the expertise to properly structure your credit needs," Donahue said. "Rarely do business plans unfold as perfectly as they were drawn up, and when they don't, having some cushion in a credit structure is key."
Know the Difference
When it comes time to apply for a loan, the banker's familiarity with the business and the prospective borrower, coupled with the CPA's analysis, will create a compelling case to fund a loan with highly competitive terms.
"It's important to understand the difference between bank products like a loan or line of credit and lending from fintech," Babine said. "This is why it's best to have a lending relationship with a banker who can help guide a business owner down the right path."
So, while the fintech sector continues to push its business loans aggressively, you don't have to settle for a quick application process with exorbitant terms. There's a long-term alternative, a relationship with a financial partner who will assess your unique needs.
- Credit & Lending
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