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“We’re not an eleemosynary institution!”

That’s the phrase one of my oldest and closest banker friends always used – he became the President of a major division of a major bank before he retired. You may not know that word – and it’s at least a “50-center”, maybe more, but he loved it and used it on me all the time.

… pause … have you looked it up yet or are you waiting for me to tell you? … come on ….

Yeah, that’s what I thought. Okay. It means charitable, as in “we’re not a charitable organization” … meaning we do have a few basic rules:

  • We expect to get paid … so we’d like to confirm that your projections provide sufficient free cash flow so you can actually pay us back.
  • We like to have some collateral in case something goes wrong.
  • We’d like to see some owners’ capital invested in the business so we know we’re in this together.
  • We’ll probably ask for your personal guaranty, too, to be sure you’re dedicated like the “bacon” and not just committed like the “egg”.
  • It would be nice if you had some kind of demonstrable track record and relevant management experience so we can assess whether you know what you’re doing in the business you’re in now.

Those are the basic rules … which is why I’m getting pretty tired of the endless news articles and blog posts about the lack of adequate capital for small business. What caught my attention most recently was an LA Times article about a Pepperdine University study.

Most of these writers don’t seem to understand that many companies simply do not qualify for bank financing … and that they’re under-capitalized because the owners simply do not have enough “equity capital” invested in their business – NOT because the banks won’t lend them money. I’ll give the journalist and university professor the benefit of the doubt since insufficient details about the study are presented … but the gist of the article is exactly what I’m talking about … lenders are ruining job growth because businesses “can’t get loans” which really means “aren’t eligible for loans” in most cases.

Banks are NOT in business to CAPITALIZE a small business. They’re here to SUPPLEMENT the owners’ capital with LOANS that get PAID BACK. They’re in business to fund growth and expansion in accordance with prudent underwriting standards that are consistent with the rules I set forth above.

As a business owner, If you think otherwise, you’re not getting good advice. You’ve got to raise sufficient equity capital – often it’s “friends and family” – or so-called “friendly money” from people that believe in you. But make no mistake. That money bears the highest risk because those investors will be the last to get paid. Yes, venture investment firms can be that source, but for 99%+ of companies, the venture market is simple inaccessible.

Start there. If you can’t do that … or don’t want to do the hard work of raising equity capital … don’t complain when the bank turns you down. That’s not their business … and it’s not going to become their business no matter how much bluster comes from the halls of Congress or how many studies get done.

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