In tumultuous economic times, a good relationship with a banker can spell the difference between survival and business closure. The best time to build this relationship is before you need it. The best time is now. Here are six steps to building a strong banking relationship.
1. Use a Local Bank
There are many reasons to use a local bank. As a local plumber it is in your interest to support local businesses in your community, so that they will return the favor. You and your business can matter to a local bank. You are just a number to a large concern. Plus, employees in local banks tend to stay in place. With national banks, they move around, causing you to start the relationship process over with each transfer.
2. Introduce Yourself to the President
In a local bank, you can start at the top. Once you have an account, ask if you can see the president or top executive of the bank or branch you are using. While you are not an imposition (bankers love to meet local businesspeople), do not take a lot of time. Introduce yourself. Hand the executive a business card, state that you run a local contracting business, and that you are hoping to build a long-term relationship with the bank. Ask if it is okay to stop by from time to time to share financial results. It is difficult to imagine a banker who wouldn’t welcome this opportunity.
3. Meet Quarterly to Review Performance
Every quarter, take the banker an income statement for the quarter and year-to-date, a balance sheet, and a cash flow statement. The income statement shows the operating results a business for a period of time. It shows revenue, cost of sales, gross profit, overhead, and net profit.
The balance sheet is a snapshot of the business’ financial health at one moment in time. All of the assets are balanced by liabilities and owner’s equity. Owner’s equity, or book value is the theoretical value of the company if you were to liquidate all of the assets and pay off all of the debt.
The cash flow statement shows the flow of cash into and out of the business over a period of time. It shows cash from operations, investments, and financing.
If you are unfamiliar with these three financial statements, pay a CPA to prepare them and review them with you until you understand them and how they interrelate.
4. Learn Your Key Business Ratios
With the financial statements you should know a few key business ratios and be prepared to discuss them with a banker. The most common ones that the banker will examine include the current ratio (current assets/current liabilities), quick ratio (cash/current liabilities), net profit margin (net profit/sales), and debt/equity.
The current ratio and quick ratio are measures of liquidity. These are probably the best measures of how solvent a company is in the short term. The current ratio should be 2.0 or higher. The quick ratio should be 1.0 or higher.
Your net profit is a measure of your ability to continue as a going concern. It tells a banker how profitable you are. A plumbing company should be at least double digits and can be greater than 20%.
Debt/equity tells a banker if you are financing your company using your money or other people’s money. If you want to borrow money, the ratio should be less than 1.0. Greater than this means you are using other people’s money more than your own to finance your business.
The ratios listed above are the ones bankers are quick to examine, so you should know them and be able to talk through them with the banker. There are numerous other ratios that are important for plumbers, such as sales/employee, gross profit, labor/service revenue, and so on.
5. Do Business Inside the Bank
Never use the drive through for banking. Walk physically inside the bank and get to know as many people as you can. Learn the names of the tellers. Talk to the managers. Become a person to the people employed by the bank.
6. Take Out And Exercise A Line of Credit
Once you have established yourself with the bank, establish a line of credit. Then, whether you need it or not, use it every few months and pay it back the following month. Lines of credit are like muscles. If you fail to exercise them, they will atrophy. Exercise them and they will get strengthened so they will be strong enough to carry your business through a tough time should the need arise.
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