Even if you already own a home-based business, these nine tips for home-based business owners will help you choose a bank. Entrepreneurs, these tips will help you develop a great relationship with your banker…
“A bank is a place that will lend you money if you can prove that you don’t need it.” – Bob Hope.
Not necessarily, Mr Hope! Here, Michael J. Harris – the founder and CEO of Aperture Capital – offers nine banking tips for successful home-based business owners. For more in-depth info, read 101 Best Home-Based Businesses for Women, 3rd Edition: Everything You Need to Know About Getting Started on the Road to Success (For Fun & Profit) by Priscilla Huff.
9 Tips for Choosing a Bank for Home-Based Business Owners
If you’re interested in turning your hobby or talent into a home-based career, read How Hobbies Become Money Making Careers.
1. Bankers aren’t the only professionals to consult. As an entrepreneur, you shouldn’t consider bankers as your sole source for capital and information. If you’re a small business owner, take advantage of a pool of professionals, such as a professional CPA firm, attorney at law or an agent working on your behalf as a bridge between your home-based business and banks.
2. Your banker has no decision-making power alone. Although every bank claims to have a “flat organizational chart,” banks rarely do. Business owners must understand the decision hierarchy – committee or chain of command – to know how a bank will determine your access to capital.
3. It’s not difficult to change or switch banks for business owners. Your current bank will play up how difficult it is to move your relationship, but the reality is that there is so much competition for you as a client (even small home-based business owners!) that a new bank will bend over backward to ensure your transition to its institution is transparent and seamless.
4. Competitive pressure still exists. Yes, there are many banks that have gone under. But an entrepreneur or small business owner shouldn’t think this means that the competitive landscape has been flattened, or look only to the typical round of “big banks” that spend a lot of marketing dollars to get your business. A great tip for choosing a bank (or choosing a financial planner) is to use the competitive field to your advantage.
5. Bigger banks aren’t always better. Although big banks offer many conveniences, they can come at a steep price: higher fees generated from non-interest income, such as service charges. Plus, at smaller banks, entrepreneurs typically get access to senior management who can make banking decisions much faster.
6. Know the power of your deposits. The more deposits you have at a bank, the more power you have as a borrower and businessowner. Your banker also doesn’t want you to know how banks weigh deposits. Ask about these equations:
- Capital ratio is the bank’s equity to risk and is the weighted sum of bank assets. This should be a minimum of eight percent.
- Leverage ratio is the bank’s equity to un-weighted sum of assets, and should be at least three percent.
- Reserve ratio equals the bank’s reserves to demand deposits. At large banks, this ratio is a minimum of 10 percent but as low as three percent at banks with up to $45.4 million in deposits.
7. Your banker should share your underwriting memo. Ask for this documentation from your banker and make certain what’s being said about you and your home-based business is accurate. Every detail should be correct, including esoteric bank ratio calculations and collateral value considerations.
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8. A lawyer should review your documents. It’s not enough to trust the typical bank documentation. You must be responsible for understanding your rights and representation. For example, understand your covenants by asking your banker to prepare a simple spreadsheet that you can use to plug in your numbers before sending them in for covenant compliance checks.
9. Review your banking relationship 90 days before your annual renewal date every year. If your renewal date is imminent, you have less room to negotiate or investigate other options. During the renewal review, consider how the covenant package fit your business over the past year. For example, did it provide you with the necessary room to run your business like you wanted or needed to? Where would you like your covenants/guaranty/structure to be in order to accommodate your direction? By knowing your desired structure, you have a better chance of steering your banker rather than your banker directing you.
Do you need a bank loan? Read Small Business Banking – Tips for Getting a Loan for Entrepreneurs.
Do you have any tips or questions about homebased business banking for entrepreneurs? Comment below!
For more info on banking for business owners, visit Michael J. Harris at Aperture Capital.