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Published: 2024, August 12

• Tips & Advice
• Banking

BY KEN LUCCI

Accessing capital from direct lenders like local banks and credit unions is obviously a critical step for growing a small business and creating long-term enterprise value. However, many transportation operators lack the ability to borrow money from local lenders to buy vehicles or establish a credit line to fund ongoing growth and expansion.

According to the Small Business Administration, more than one-third of small businesses ultimately fail because they cannot access capital when they need it, while around 45 percent of businesses with under $1M in annual revenue have poor credit scores, making them undesirable candidates for direct lending. Further, the Federal Reserve Small Business Credit Survey found between 2021 and 2023, about half of all small businesses that applied for commercial loans were denied by direct lenders because they were unprepared or considered too high of a risk. While it is true that banks have been stricter since the pandemic, that number is staggering.

So much of what we do today is online and behind a screen, but face-to-face relationships still do matter. In ideal circumstances, the best time to create a relationship with local lenders is before you need a loan. Asking a new bank for a loan without having done any prior business with them can raise red flags, make you appear desperate, and look like you don’t have your financial act together before starting the application process. Creating a rapport with your local lender is like establishing any other relationship, whether personally or in business: building the strongest connections takes time, requires nurturing, and involves trust.

Do you need to get started? Here are some strategies I would suggest when developing a long-lasting association with your local lender.

❱ Research Local Banking Options: Identify local banks or credit unions that welcome small businesses, have a strong reputation as commercial lenders, and meet your banking needs. Ideally, the bank you want to get a loan from is the bank you use for your normal business banking. Local banks appreciate local depositors, especially ones that have decent annual revenue. Explore the small business services they offer, such as business checking accounts and savings account terms, fees and restrictions, credit lines, business loans, merchant services, credit cards, and cash management solutions. Local banks compete partly by offering more favorable interest rates, terms, and fees and added benefits, so do your research and compare.

❱ Ask Other Local Businesses for Referrals: Local banks with deep community roots create relationships with the best local businesses. When you are considering which neighborhood financial institutions to work with, seek advice from other small company owners in your circle. Alternatively, you can ask your attorney, CPA, or even business owners who use your services. Find out who they bank with and if they can recommend specific banking contacts. If you belong to a local organization—whether a civic group, sports, or country club—ask other members who own businesses who they trust for local banking.

❱ Build a Local Network of Business Leaders: Participate in local business networking events, civic associations, and community gatherings where you can mingle with representatives from local banks. Networking provides opportunities to connect with bankers, learn about their services, and showcase your organization within the community.

❱ Choose a Bank That Is Engaged in YOUR Community: Look for banks that are involved in local associations, initiatives, and sponsoring charity events. The best way to observe this is to attend them and involve your business as well.

❱ Make Personal Connections First By Dropping By: Make it a point to introduce yourself to branch managers and express your interest in establishing a comprehensive banking relationship. A great start is to ask for information about commercial banking and loans. If they have brochures or pamphlets on the subject, chances are they focus on small business lending.

❱ Schedule Formal Meetings: Once you have narrowed your choices to two or three local banking options, arrange face-to-face meetings with local bank managers, relationship managers, or the highest executive you can to discuss your business needs, goals, and financial requirements. Use these meetings to ask questions, seek advice, and explore potential banking solutions tailored to your enterprise.

❱ Remember That You Are the Customer: Many larger national and international banks have high turnover rates with managers who have little authority compared to local banks. Avoid banks where you cannot meet with a manager or someone on the VP level. Finally, don't forget that you are interviewing them as much as they are interviewing you.

❱ Build a Credit History for Your Business: Maintain a positive business credit history with the bank that you choose by paying on time and managing any credit facilities or financing arrangements. When a bank observes timely payments, consistent cash flow, and dependable financial management practices, it enhances your business’s creditworthiness and strengthens your relationship with the bank.

Distinctions for Local Banking Options
↹ Credit Unions operate similarly to a bank but with a few key differences. They are typically not-for-profit and are owned by their members who often have a common bond, such as being in the same profession or living in the same community. The best credit unions focus on their members’ financial needs rather than maximizing profits.

↹ Cooperative Banks, also called co-op banks, are like credit unions but are usually governed democratically, with members electing a board of directors to oversee the bank’s operations. The board is typically responsible for making key decisions about the bank’s policies and strategies.

↹ Local Banks are normally smaller in size and typically operate within a specific region or community. They may have a handful of branches so lending may be influenced by local conditions. They are often privately owned or owned by shareholders who live in the community.

↹ National Banks are larger and may have a presence in multiple states or even across the entire country. They often have hundreds or thousands of branches and serve a much broader customer base. National banks are usually publicly traded corporations with shareholders from across the US or the world. Because they are subject to more extensive regulations, their decision making on loans is generally more rigid than local banks.

While both local banks and national banks provide essential banking services, they differ in size, scope, ownership, focus, and accessibility. Each may cater to the lending needs of different segments of the market, so when you research banks, make sure they are keen to lend to small businesses and have an actual history of doing so.

What Local Banks Are Looking for From You
1. Healthy and Up-to-Date Financials: A business that produces monthly financial statements and demonstrates month-over-month and year-over-year growth, healthy cash flow and consistent profits provides confidence that they have the ability to pay back loans or credit lines. Generating accurate monthly financial statements that document healthy financial metrics will improve the chances your commercial loan will be approved compared to companies with poor financial record keeping and no consistent profits.

2. Skin in the Game: Banks are more likely to provide a vehicle loan when an operator comes to the table with a sizeable deposit in the area of 25-30 percent because it limits the bank’s risk.

3. Collateral: Offering collateral to secure loans or lines of credit like existing fleet, real estate, or accounts receivable gives banks a sense of security in case of default.

4. Stellar Credit History: Maintaining a solid personal and business credit history demonstrates creditworthiness of the owner as well as the business itself. Always pay bills on time and manage debt responsibly. Give the bank a list of vendor or regular payables.

5. Written Business Plan: Having a written business plan that outlines specific business goals, tactics, strategies, market analysis, and detailed financial projections for the next three, five, and 10 years. This demonstrates industry knowledge, expertise and a road map for future success.

6. Professionalism: This includes having a current and updated website, business email addresses, business cards, and professional marketing materials. Superior branding and a refined image instill confidence that you are serious about growing your business.

7. Diversified Client Groups, Services, and Revenue Streams: Point out that your business serves multiple types of clients, offers multiple services, and generates revenue from varied sources. This will demonstrate your company is not overly reliant on a single customer or service type. Diversification reduces risk and makes your business more attractive to lenders.

8. Strong Management Team: If you have a team, demonstrate their skillsets and experience managing the business effectively. Lenders want to be sure you have a capable team to execute your business plan.

9. Business Making a Local Impact: Highlight how your enterprise positively impacts the local community by creating good paying local jobs, contributing to the local economy, and even community engagement like supporting local charities.

10. Local References From Satisfied Clients or Completed Projects: Showcase customer reviews, thank you letters, or recommendations from local clients or companies. If you have completed a large project recently, offer a description or a press release on recent successes.

When it comes to the financial health of your business, you should follow this rule: Always be prepared for whatever lies ahead. Attempting to arrange credit lines or business loans in haste without any existing bank relationship can lead to higher interest rates, smaller loans, or a rejected application. Having a local banker as an advisor and advocate elevates your business above competitors, putting you in a class all your own.   [CD0824]

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Ken lucci is the principal business analyst and founder of advisory firm Drivingtransactions, as well as the author of the industry-specific financial management course, Driving Financial Success. He can be reached at klucci@drivingyourincome.com.