It’s time to grow, hire employees, rent a larger space, or purchase a company car. You may have started your business with friends and family funds, but now, it’s time to take out a loan with good terms. Any business loan or line of credit from a bank—brick-and-mortar or online—will carry more favorable terms if you have a decent business credit score. Lenders use your business credit score to determine how likely you are to repay your loan; the lower the score, the less attractive you are to a lender, especially banks.
At the end of the day, banks look for creditworthiness. Get tips on building business financial confidence.
A company’s creditworthiness impacts a business owner’s loan terms, liability insurance premiums, and the regard of investors, vendors, and clients. The better a company’s credit score, the better its financial position. How does making friends with a bank build vital business credit? A positive relationship with a bank is the tried-and-true method for obtaining a solid business credit score.
Far from a fair-weather friend
Banks are trusted and protected institutions that depend on the law of the land and a robust economy to remain safe depository and lending options for consumers and companies. In other words, banks are far from fair-weather friends to your business. Owners can choose among several financial institutions such as a business bank, a credit union, a community bank, an online bank, an investment bank, or a U.S. branch of a foreign bank. Typically, businesses should look for essential business banking services such as interest-earning checking accounts, business savings, business credit cards, money transfer services, cash management, and business financing options. After the Great Recession and the COVID-19 economic slowdown, businesses may be very interested in befriending an SBA-approved lender. To grasp what your business needs from a bank takes time and accounting expertise. Bankers are happy to meet with potential customers and cultivate a professional relationship with them. Are you making it easy or difficult for bankers to love you and your business?
Everyone starts somewhere with business operations. We put together a guide on understanding your finances to get you off and running!
Is your bank friend material?
Business banking is a relationship that should last the lifespan of your business. Befriend a bank, and it’s always there for you, no matter what. However, businesses come and go more frequently than banks. Also, federal and state agencies heavily regulate banks, credit unions, and other financial institutions. Bank penalties for violations of the law are costly. For example:
- USAA Federal Savings Bank paid $85 million for violations of its compliance risk management and cybersecurity programs found by the Office of the Comptroller of Currency.
- Deutsche Bank AG agreed to pay $120 million after the Securities and Exchange Commission fined the bank for violating the Foreign Corrupt Practices Act (FCPA).
No wonder banks want to be convinced by the business financials and not your scotch whiskey recommendations. Organizations with robust accounting software and solid accounting practices boast the following winning attributes banks require:
- Strong management
- Business acumen
How can an entrepreneur or small business owner become creditworthy (i.e., a high business credit score) without repaying a bank loan? The answer to that question is: it’s much more challenging. Ask any medical or recreational marijuana concern in the U.S.
U.S. cannabis industry really, really wants to be friends with banks
The cannabis industry has many friends in the U.S. Regulated pot was valued at $11.3 billion in 2018, and in 2020 nationwide sales of the herb increased 67% ($18 billion). Unfortunately, the cannabis industry has a heck of a time banking because selling pot is illegal in most states and unfriendly to the Financial Crimes Enforcement Network (FinCEN), a division of the U.S. Department of Treasury.
Banks that follow the FinCEN guidelines do so in open violation of the Bank Secrecy Act (BSA). This is the case because they are directly engaging in money laundering because cannabis remains federally illegal, and this is why virtually none of the really big banks (like Bank of America and Wells Fargo) will knowingly take on cannabis accounts. But for those banks that are willing to take on cannabis bank accounts, you need to be prepared to basically do whatever the bank tells you to do to secure that account because the bank will be the one to be held accountable to the federal government for violating the BSA. – Hilary Bricken, Above The Law
In April, the U.S. House of Representatives voted by an overwhelming majority for the Secure and Fair Enforcement (SAFE) Banking Act, allowing banks to serve cannabis sellers in states where marijuana is legal. Now, it only needs to pass in the Senate. Maybe the fourth try will succeed in opening up business banking to the cannabis industry. Senator Jeff Merkley (D-OR) made the case a year ago that a cash-only marijuana economy is terrible for cannabis business owners and encourages criminal activity. Some who watch the cannabis industry wonder if the SAFE Banking Act will happen before the federal government legalizes pot?
The National Cannabis Industry Association also said on Monday that advocates are hopeful that Senate Banking Committee Chair will take up the bill in the near future so that it can begin to move through the upper chamber as soon as possible and become law before the end of the year. – Shariq Khan, Reuters
Whether or not state-sanctioned and regulated cannabis and related companies will be welcome customers at financial institutions by the end of this year, there are best practices for befriending a bank.
Things to know about making a bank your BFF (business friend forever)
Expect more than one meeting with your chosen banker. The HomeBank of California recommends that, at a minimum, it will take a banker four sessions before they can offer sound solutions for your business. Of course, the quality of a banker’s advice for your business will also depend on your transparency. Be open and prepared for a bank’s due diligence. Banks want to learn as much as they can about you and your company’s creditworthiness, including your business model, management style, budget, cash flows, and much more. Make it easy for a bank to get to know your business financials. A system of accounting will provide the assurance to please banking regulators and loan underwriters alike. For example, banks that do serve regulated marijuana businesses are required to submit suspicious activity reports to the federal government and are responsible for monitoring all transactions from your deposits to your social media accounts. A compliance program is critical for business and banking. Certainly, there are steps to take if the IRS audits your company, but you will need experienced guidance through a compliance audit. A bank wants allies in business prepared to act, not just a buddy looking for a bailout. Stay in touch with your bank in good times and bad. The channels for communication with your financial institution have changed over the years. Bank customers are moving away from in-person meetings, and communication is much more digital today. Nonetheless, your bank will want to hear from you formally (scheduled reports or conference calls) and casually over a meal at a charity event. Take the advice of an experienced cannabis CEO on what is needed to stay on good terms with a bank.
After securing a bank account, you can expect routine, multi-tier audits that will review your bookwork, metrics, and compliance. You’ll need efficient and astute accountants, which aren’t abundant in cannabis — many auditors find shoddy work that barely passes for bookkeeping when examined. An adept financial team is the only chance you have. Your best option is to hire accountants that have been through an IRS audit or two with a marijuana business. – Christian Hageseth, Green Entrepreneur
Hire accountants that know your industry and have technical expertise in IRS audits if you want to maintain a partnership with a bank. I couldn’t have said it better, Christian. Building an enterprise without a great relationship with your bank makes your dream harder to realize. inDinero’s seamless accounting technology, concierge onboarding, and custom pricing is a total package of business insights, customer service, and scalable solutions. Schedule a call with our experts.
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. inDinero assumes no liability for actions taken in reliance upon the information contained herein.