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Positive return on investment: building relationships at the bank

by Meredith Erlewine

February 1999

When a local banker told Sherrye Hutcherson, executive director of the Omaha Small Business Network (OSBN) in Omaha, Neb., that many of her clients simply weren't prepared enough to secure a loan, she didn't go back to the incubator without a deal. Hutcherson asked the banker to teach her clients how to prepare to get the loans and went back to OSBN's incubator with a new technical assistance program and a loaned bank executive (see "Incubator-bank collaborations" below).

Hutcherson and other savvy incubator managers have found that local banks are coming through for incubators and start-up businesses in ways no one expected a decade ago. Nationwide, banks have created venture funds, teamed up to create start-up-specific loan pools, loaned out executives' time and expertise, donated office space and made loans to previously unbankable start-ups. How did Hutcherson and her associates attract these invaluable allies? They knew they could offer the bank excellent business opportunities and marketed their clients and programs as such.

"A working relationship between a business incubator and the financing community is a natural fit," says Mark Barbash, executive director of the Columbus Countywide Development Corporation (CCDC) in Columbus, Ohio. At CCDC, Barbash and the staff of the private nonprofit provide financing to small businesses, partnering with area lenders and the federal and state governments. "Banks and other small business lenders are looking for financing opportunities for growing businesses," Barbash says.

The incubator-bank relationship is one that every incubator manager should nurture in a professional and calculated way. Barbash has some insightful do's and don'ts regarding three of the most important aspects of incubator-bank relations: getting bankers involved in your economic development system, getting clients' deals funded and getting bankers to contribute funds to your program.

Forging the relationship

Before you can obtain any type of funding or in-kind support from a bank, its managers and lending officers must know who you are and believe in you and your organization. "Make sure the first thing you do when you're trying to develop the relationship is not to ask them for money," Barbash says. It's important to get banks involved with your organization to the point that they look favorably either on the businesses that you bring to them or on investing in what you do. That, Barbash explains, is achieved through extensive networking.

Names in the banking industry are constantly changing so schedule frequent, one-on-one visits with your bank's managers and major lending officers. Even if the main loan officer at the corner bank was well acquainted with you a month ago, he or she could be working at a subsidiary in Kalamazoo by now. Introduce and re-introduce yourself to all of the bank's main players often.

Work with as many as possible business lenders, leasing experts, asset-based lenders and community reinvestment professionals, to name just a few. Like any other large conglomerate, Barbash explains, banks are divided into profit centers, which compete against each other. "Your list of bankers in a large bank is going to be anywhere from 50 to 100. The value of a small bank is it's likely to be three people, perhaps including even the president of the bank," he notes. It's also a good idea to send every bank in your city your incubator's financial statements every year, even if you don't have a loan with them. "They're interested in financial stability," Barbash says, so make sure they're fully aware of yours.

Don't assume a business incubator's high-risk clients will scare off the bank. Even though the bank has what you want money incubators have something banks need, too: potential long-term customers. Banks don't just sell loans. They sell credit cards, checking, savings, money market and personal money management accounts, and more. When you introduce lending opportunities to your banker, you bring potential customers for the bank's other departments.

Potential customers are precisely what bank executive Dave Rader sees when he looks at equity investment applications at Norwest Bank in Anoka, Minn. Rader is vice president and market manager for commercial lending at Norwest, where he serves on the 15-person board of an equity fund supported by area banks and utility companies (see "Working together to ensure start-ups' success" below). "Obviously, they're going to need checking accounts and the like to get them going. And in the long term, as the business plan takes off, there will be lending opportunities most likely U.S. Small Business Administration (SBA) lending products. As the business moves through its own growth cycle, you've got cross sale opportunities. Most companies [receiving an equity investment] are trying to go public, so you have the stock transfer business and opportunities for investment, insurance, and for banking their employees," Rader says.

Getting a banker on board

Once you've gotten acquainted with your local bankers, get them involved in your projects with the goal of developing long-term credibility. Go for someone as high up in the bank as possible. Barbash explains that although the lenders do the work, it's the executives who reinforce their lending position.

Find out who the active small business lenders are in your community. One way to do this, Barbash suggests, is to call the SBA and ask for a list of banks in your area that participate in the 7A Loan Guaranty program. According to Barbash, banks that are willing to deal with the paperwork involved with that program tend to be economic development players in your community.

Next, go for the gold invite the bank presidents to serve on your board. If you do not already have a relationship with these executives, the government officials or corporate professionals on your board may. Tell the bank presidents your organization's mission and explain that one way you can expand your incubator's client services is to expand its board of directors.

It's not a bad idea to offer all of your community's banks the opportunity to participate, with the knowledge that not everyone will accept. And if you're lucky enough to have more than one banker on your board, don't play favorites. Provide each equal opportunities to work with you throughout the year, such as offers to participate in financial services seminars or to help you make loan decisions for an in-house loan fund. At CCDC, Barbash and his staff created a loan review committee for the organization's microloan program. The committee doesn't physically meet, which makes the process easier for the bankers. Each banker gets a simple checklist regarding the loan application; if the bankers agree the deal is a good one, CCDC makes the loan.

Making deals

Having established healthy nonfinancial incubator-bank relations, it's much easier to approach the bank for financial support. Whether you're helping a client secure a loan or seeking a financial contribution for your incubator, you'll already have your "in" and will be able to focus on the details of dealmaking.

"It's important to understand where the banker is coming from and what his challenges are," Barbash says. "[Bankers] are nothing more than money managers. They are there to take money that their depositors have invested and invest it in places that produce a specific kind of return. As practitioners, our challenge is not to send businesses there when we know the bank won't make them a loan." In other words, don't waste the bank's time.

When clients seek bank financing, Barbash suggests that incubator managers help move the loan approval process along. "The faster they can make a decision for your customer, the better it is for everyone," he says.

There are ways to get the banker interested in your client's deal. Barbash suggests writing an executive summary that spells it out: Here's the business. Here's how old it is. Here's what its owners want to do. Here's their financial history. Is this a deal you want to look at?

If the banker is interested, help your client get all necessary supporting documents in hand. "When they don't get all of the documents, they will not make a decision and will also avoid telling you what they think," Barbash says. If you know the banker wants to see a business plan, three years' tax returns and personal financial statements and you and your client are there without them, you're that much further away from a decision. Also, make sure the business itself is prepared. "We're looking for a business plan, and we're looking for items in that plan that address the project's feasibility. We're also looking for some type of owner's investment, whether it be sweat equity or a capital injection. We're also looking for comfort with management that we feel [the management team] can really fulfill the business plan," Rader says. Belva Rasmussen, chairman and CEO of Northeast Bank of Minneapolis in Minneapolis, Minn., agrees. "They should have financials and a business plan, which doesn't necessarily have to be sophisticated. We need to know where the cash flow is coming from, all about the product, and who is buying it," she says.

You and your client should be prepared to discuss the financial statements in banking terms. "Know and speak the banker's language," Barbash says. "Know what a loan-to-value ratio is, what collateral coverage means." It's also important to be honest with the banker about the creditworthiness of a deal. Point out shortcomings in collateral. Don't hope the banker won't notice he will. Present your client's deal with the knowledge that banking is negotiating. "Bankers hate it when I say that," Barbash says. When you're trying to sell a deal to the bank, ask for more than you need. "If you say, 'Well, I think I need $100, 000,' the banker comes back to you and says, 'OK, I'll give you $100,000 for three years at prime plus two and a half.' What you should do is go in there and say, 'I need $150,000, I need it for five years, and I'd like it for prime plus one and a half. I will give you the following assets as collateral, and this loan will get repaid based upon the cash flow from the business, and here are the financials, cash flow analysis and personal guarantees we're willing to give you.' Don't just walk in and say, 'I need some money,' because then you are at the banker's mercy," Barbash says.

To prepare you and your clients for shrewd negotiating, get some training in credit analysis and negotiating. "The purpose is to help you understand how the bank makes a decision and how to mess with the bankers' minds, if necessary," Barbash says. The banks will even help you out in this area, if you go about it the right way. Take a banker out to lunch, tell him you want to learn how his bank makes loans then ask all the questions in the world. "He'll tell you, as long as you're not presenting a specific request for a loan," Barbash says.

Before you approach a bank, find out what that particular institution's decision-making structure is. Typically, an individual loan officer can make his or her own decisions to a limit. Usually at $500,000 there's a committee of two, and at some point, the decisions leave town. What then? "Take a road trip," Barbash says. "Get to know the people and how they make decisions." It also can be helpful to meet with a banker confidentially about potential projects. Show her a set of financial statements. Don't ask her to make a decision, just to tell you if it's a deal that might interest her. "If it's a start-up company that already has financials and wants to see if it is viable, yes, I'd be willing to look at their information," Rasmussen says. "We are always open to look at somebody's business plan. If it's not a deal for us, we'll make other suggestions."

Many of the rules for helping clients seek funding also are applicable when you're looking for financial contributions to your incubator program, and there are several things you can do to increase your program's chances of receiving money. One of the most basic things you can do is behave like your companies must write a business plan. "Banks are like everybody else: They want to know how their money is going to be used, and they want to know who else is going to be involved," Barbash says. The plan doesn't have to be long or elaborate. "What you have to remember about getting banks to make contributions is that invariably the decision is made by someone who you will never meet, so you have to have a piece of paper that can be passed up the line," Barbash says.

Your incubator might even invite the bank to help with the project's planning stages. According to Barbash, banks like to be involved in the creation of programs up to a point. He cited the microloan program CCDC put together. Staff held brainstorming sessions with local bankers early on in the process. "We said, 'Hey, we've got this opportunity to get some money from the SBA. What do you think about that?'" CCDC staff noted the bankers' suggestions, then let the banks know what they had decided to do. "Then we asked them to invest in the program they had some involvement in but not with the decision making process in terms of individual loans," he says.

As Barbash cautioned before, don't limit yourself at the bank. Some banks' Community Development Corporations make investment decisions, and some banks' contributions divisions write checks for "good deeds." "In many cases, they fund exactly the same things, but with different motivations and with funds coming from different locations," Barbash explains. Most banks have a charitable giving person, too, who is responsible for working with the nonprofits in the community. "If you don't know this person," Barbash says, "get to know him [or her], and get him to come out to the incubator." And when he does, don't introduce him to your manager or staff but to his potential customers your client companies.

When looking for bank support for your program, don't ask each bank for the same amount. Base your request on the bank's market share and asset size. You can find this information in a local business newspaper or at your local SBA office. "And don't be disappointed if the bank says 'no,'" Barbash says. "It may not fit into this year's plan, but it may fit into next year's plan."

Finally, it's absolutely imperative to include banks in incubator success stories they've had a part in. When you market your clients' successes, if one of the businesses has a bank connection, be sure to give the bank credit. It's one of the most important things you can do. "Whenever you've got an opportunity to say to the press, 'Here's our success,' the banker should be next to you," Barbash says. "It will bring money into the system."

Incubator-bank collaborations

Here are a few examples of creative ways incubators have worked with their local banks:

  • The Border Region Business Incubator in Bisbee, Az., found affordable space at the bank: The incubator operates under a facilities grant from Bank of America (BofA). When business slowed down at the bank's downtown branch, BofA's Community Development division agreed to lease the incubator 2,000 square feet of excess office space for $150 a month, utilities included. Bank authorization of the use of an additional 2,000 square feet was pending at press time. "While this may be an unusual collaboration driven by the bank having excess facilities in Bisbee (two branches serving a city of 6,500) this collaboration makes BofA-Arizona a good starting point for a discussion of additional incubator projects," says Stephen Kaczor, Border Region Business Incubator president.
  • Three community banks in Platteville, Wis., have pledged loans for a 26,000-square-foot incubator under development by Platteville Business Incubator Inc. There's an unusual twist: Each will provide $60,000 at 5 percent interest for twenty years. "The incubator would pay the interest annually, but the banks would then in turn donate the interest back to the incubator," says Howard Brooks, a member of Plateville Business Incubator's board of directors.
  • Sherrye Hutcherson, executive director of the Omaha Small Business Network (OSBN) in Omaha, Neb., convinced Jim Swoopes, vice president of First National Bank of Omaha, and his associates that providing OSBN with a loaned bank executive would grow better small businesses, help loan officers understand the entrepreneurial mindset and create excellent business opportunities for the bank. Four months into the program, Swoopes says having a First National commercial lender spend 30 hours each week helping OSBN clients write business plans is a good thing for everyone involved: "Young loan officers get real-world experience, and OSBN gets an excellent technical assistance provider at no cost to them. It also enhances the bank's opportunity for meeting Community Reinvestment Act requirements." The program fosters entrepreneur-bank relations, too. "Entrepreneurs get firsthand training in business finance from a loan officer, and an educated customer is probably the best one you can get," Swoopes says. Partnering with local banks is nothing new for OSBN. Its incubator, the Business and Technology Center, sprung from collaboration between the city of Omaha and Norwest Bank of Omaha, which loaned OSBN an executive director for many years. Today, OSBN counts four big banks and two small banks as sponsors, and as far as the rest of the banks in town go, "We do deals with them all," Hutcherson says. "I think we have a good relationship with the majority of the banks because we have a solid program and we continue to market our program throughout the city."—M.E.

Working together to ensure start-ups' success

In the Twin-Cities area of Minnesota, a unique public-private partnership helps promising start-ups get off the ground. The nonprofit Anoka County Economic Development Partnership created the Anoka/Sherburne County Capital Fund, a for-profit equity fund that invests in early-stage technology and manufacturing companies. The fund started in response to entrepreneurs' requests for financing in the form of equity, not debt. "We decided that we were going to target investors who would be interested in seeing the area grow: bankers and utility companies," says Roger Jensen, executive director of the Anoka Partnership and president of the fund. Bankers, Jensen says, are interested because the more development and growth there are in the area, the more money they make (likewise with utility companies). "If we can help develop a healthy business environment, that in turn contributes to Northeast's overall business strategy and growth," says Belva Rasmussen, chairman and CEO of Northeast Bank of Minneapolis and member of the capital fund's board of governors. The fund was capitalized in 1993 with relatively small donations ($50,000 to $100,000) from local banks and utility companies, and is now at $1 million. The Anoka Partnership then collaborated with Harlan Jacobs' Genesis Business Centers, a for-profit incubator in the area.

A typical scenario is as follows: A start-up will receive an equity investment (usually $25,000 to $100,000) from the fund for working capital, commercialization, marketing or other uses. Then, Genesis barters one year's rent and top-notch business assistance services for equity in the firm. Companies receiving an equity investment must agree to remain in Anoka or Sherburn County for at least five years from the time the fund makes the investment. The mixture of the equity fund and the incubator, Jensen says, is "like magic."—M.E.

Keywords: accounting/financial management -- client, funding sources/fundraising -- incubator, networking, partnerships – organizational/corporate, strategic partnerships

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