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Friday, January 9, 2009

What Is The Ideal Banking Strategy For A New Small Business?

The best banking strategy for a small business? Have a line of credit set up before you need it.

That means you need a business plan, or at least cash flow projections. For your own use, you need to have a worst case scenario to determine your maximum needs. That should be your target for funding, although you won't necessarily share that with lenders.

A line of credit with vendors is always a good thing as they are, in essence, a free source of funds. Although that can go sour really quick if you don't maintain a good payment history. But, for every vendor you can pay at 30 days, that is a 30 day loan you don't have to take out.

Depending on your business, there are sources of funds besides banks, and depending on circumstances can be reasonably priced. I'd Google for those options.

And, as much as possible, you don't want to sign personally on the loan, nor collateralize it with personal assets, although it is unlikely you will be able to achieve that, at least initially.

Since my brother-in-law is an accountant, I would be remiss if I didn't insist that you keep a good set of books. You can't manage what you don't measure, and the way businesses (and lenders) keep score is in dollars and cents. So, keep those numbers current and accurate and that will go a long way in helping you manage your business.

Another idea would be to try a lean approach to banking.

The first step is to ensure that you have a solid cash flow budget that considers the costs and delays in funds availability. This is the ultimate tool in managing banking for a small business. Have a candid and open discussion on banking services with the bank of your choice.

Keep in mind that banking and treasury management go hand in hand in a small business. Consider each method of payment and consider the costs of settlement for transactions (e.g., wire receiving fees). Most to all banks have online resources to help manage banking and treasury activities. The basic backbone of banking strategy is to separate the accounts by type: operating (one for receipts and another for disbursements), payroll, and legal (for escrow and sinking funds). These would typically be checking accounts.

Synergize where your customers and vendors will use the same bank. Transfers between you and your customers and vendors will then have minimal to no cost. For customers and vendors who do not use the same bank, and do not accept ACH or credit cards, utilize tools like PayPal to minimize transfer fees. Additionally, with customers and vendors who do not use the same bank as your business, consider funds availablity if tools like PayPal are used.

Although this type of plan is not formally a part of your business plan, prepare a grid to "map" quickly and concisely the potential costs of doing business for 1) customers using the same bank and 2) customers using a different bank. This will also help you to manage the true cost of serving customers. Also, have this plan handy when you have discussions with your bank on the cost of services they provide.

There you go .... might look like Greek but all of it is important. Just wait until your head stops spinning and reread it all again. Do that until it sinks in .... it's that important.

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