Despite benefitting from a low cost of capital, your enterprise is still burdened by higher costs to finance its inventory, its capital expenditures and most importantly, its receivables. Why is this happening? Well, in this economy customer demand is down, and customer bankruptcies are up. Both increase your costs of financing, and both impact your cash flow. However, there’s something far more important to be concerned with: whether your bank is committed to your small business. Ultimately, aligning yourself with the right bank does make a difference. It’s up to you to define what you need and which bank can help your small business succeed.
The Largest Banks Aren’t Always the Best
One of the consequences of the most recent global recession is that more and more of today’s largest banks aren’t willing to take the risk of providing working capital to small business owners. Large banks don’t always equate to better service. Ultimately, choosing a bank to work with comes down to defining what your small business needs.
What Types of Services Does Your Small Business Need?
Your bank should be willing to provide more than just a place to deposit your money. For instance, the best banks help with cash flow management by helping you reduce your costs of financing. Some institutions can help you setup merchant accounts for online transactions. Services like business lines of credit, and alternative financing options like factoring and purchase order financing, help to reduce your costs of capital and improve your cash flow. Others can provide insight and research into your small business’s market. Ultimately, you must decide what you need and which bank is best suited to working with your enterprise.
Cash Flow Management: Cash flow is vitally important and an essential part of financing your daily operations. It is a good idea to come up with a rolling forecast of your cash flow needs on a weekly, monthly and quarterly basis. Base this analysis on how fast your customers are likely to pay and how much capital you’ll need to finance operations.
Merchant Accounts: Ideally, you want to work with a bank that can help you reduce the fees associated with managing online orders. There are multiple fees and transaction costs associated with accepting, processing and invoicing customer orders. The best banks provide a full-service, turnkey solution to managing your merchant account and they ensure their fees are upfront and transparent.
Line of Credit & Alternative Financing: The best way to manage your cash flow is to ensure your business is able to deal its seasonal business cycles. As such, your bank should provide you with a business credit line that allows you to manage the cyclical nature of your market. Additional services could include receivables factoring and purchase order financing. Both allow you to maintain a rolling credit line based on open invoices and current backlog.
Market Insight & Research: A bank may also be able to research and provide insight in your market. This is especially the case for smaller local markets, ones where banks can provide invaluable insight based on the knowledge they’ve gained with similar businesses.
Start by defining what your business needs. For instance, do you need help with cash flow management, setting up a merchant account, researching your market, or do you just need help in setting up a line of credit that covers your capital requirements? Next, research your options and focus on solutions that allow you to manage your business without encountering cash flow issues. Again, not all banks provide the same levels of service. Some focus solely on loans, while others provide a complete solution. Choosing a bank begins and ends with you defining what your small business needs.
References & Sources:
The Customer Demand & Inventory Gap: The Bell Curve
Small Business Bankruptcy Jumps
Consumer Confidence Falls to Post-Recession Low
Small Business Can’t Get Loans From Bailed-Out Banks In U.S.
Small-Firm Loans Lagged in the U.S.
Bio: This article was written by Karl Stockton for the team at Kanetix; they can assist small businesses with their Kanetix credit glossary.
