The Banks are an indispensable part of startups and small businesses.
When we started our venture, banks for me was a place to do our transactions and get our salaries
As our business grew, I learned the constructive role a bank can play in our company’s growth.
Banks definitely have a bigger role than you and I can think of in helping you grow.
A good exchange rate from a foreign client can increase your earnings.
While undue charges from banks can affect the earning adversely.
Banks can also help you raise a decent amount of money as an unsecured business loan. Loan for a start up or a small business is essential to keep the ship afloat. As your relationship grows with bank, you can definitely leverage your good relationship to get unsecured business loans from them based on your company’s balance sheet and a good banking record. after a certain time duration. (note: The unsecured funding rule might not be applicable to you if you are just starting or do not have a decent balance sheet)
(note: The unsecured funding rule might not be applicable to you if you are just starting or do not have a decent balance sheet)
The banks in India are tricky to deal with. (I am told they are the same all around the world. The rich bankers who can make your poor)
We have worked with a few banks in last few years.
Over the course of time, I have learned many lessons while dealing with different banks.
I am sure they will come in handy for you to grow your business.
Here are the few tips for you and your business:
- Never keep all your eggs in a single basket:
Never ever deal with a single bank. We just learnt it the hard way, when our preferred bank refused to give us a loan.
Today, we deal with 3 banks and divide our bank accounts based on our divisions and services offered by a bank.
For ex, govt banks can never give services on par with a private bank. But govt banks have their own set of advantages,
Bottom line is, always have more than 1 bank account.
- Maintain a clear line of communication:
Every bank has a relationship manager for your bank account.
At least, banks claim they do.
Startup and small business owners have their own battles to fight.
Where is the time to communicate with your relationship managers?
Take a small piece of advice (free). Get to know your relationship manager.
The manager might pester you once or twice in making few investments.
We cannot blame them a lot.
They have their targets too.
Anyways, it will be all worth getting pestered, if you know how to use your relationship with your manager.
Here is what your manager can do for you:
o Get the charges on your account reversed. Businesses are unpredictable. You never know which quarter you might not maintain the minimum balance or there are some bounces. Your relationship manager can get them reversed.
o The RM can help you with cheques, cash deposit, applying for loans, etc, etc.
o They tell you if a cheque is deposited and the bank account does not have money to get the cheque encashed. Our last bank always forgot to tell us. And they were not obliged to tell us. This is an add-on service you get, once you keep up a good relationship with your RM.
At the end of the day, they are there to fight your battle with banks. Think of them as allies and smoothen your banking process.
I know what I have mentioned here is basic stuff. We all are supposed to know this. Right?
Not for first-time business owners. I still know of friends, who have never had their charges reversed or know, bank negotiate loan amount.
- Do not be scared of the documents:
The one thing I hate the most about the banks is the number of signs they make me sign on the documents I do not understand a thing about. Add to this, the number of documents they ask.
All the small letters with “banking lingo” makes it harder for anyone to understand, what is cooking.
Over the years, I have started spending a little time reading the harder to read documents of banks.
Has it helped?
But I still try to be an informed customer.
I have been cheated in past by partners when I trusted and signed without reading the document.
As they say “Once bitten. Twice shy”.
Also, one of my close relatives was royally screwed by their bank for signing on blank papers.
So I try to read as much as I can before I sign over the ticked boxes.
I know you cannot change the document even if you want to but it does you no harm to at least go through the document.
The innocuous looking document might turn into a daemon tomorrow. At least go through the important points.
One habit I have improved upon in last few years is helping the loan guys with all the documents they need.
Not an easy thing to do, when their insatiable demand for documents is beyond your control.
Be patient with your loan officer. Their job is harder than yours. Appreciate the time, they are putting in getting your accounts to your bank.
The more your help them. The sooner the file moves.
Don’t be a grumpy customer who complains to them every time on why they need so many documents.
They do have more files than you can imagine. When you have applied for a loan, do not let your file go to the bottom of the list because you are the uncooperative customer.
- When demand for investment increases and services decrease, time to find a new bank:
When I opened my bank account with our soon to be ex-bank, the manager was a very fine guy.
He was always around the corner to listen to our grievances and his team worked around the clock.
As soon as he left, the new team in the bank was always interested in investments.
We did not get out service tax challans from them for months.
All they were interested in was when we would make a new investment with them.
The services degraded, demand for investment increased.
Time had to come to move to a new bank.
Startups or small businesses need money from time to time. Especially, during the phase of growth.
Many startup owners are without property which only makes them eligible for an unsecured loan.
We were refused loan twice by the same bank with whom we had maintained a relationship for years.
We cried foul.
At the end of the day, they followed the rules.
Remember, banks are not here to take risks for you. They will only fund you if they find your credentials to be worth investing.
And with rising NPAs, the going just got tough for businesses to raise unsecured loans.
Here are mistakes we did in recent years (some of them are stupid. Others are unintentional and rest are drastic).
The same bank which got investments done from us as and when required, turned their bank on us when we needed them the most.
Here are the mistakes (a “not to do” list for every new business) we did:
- We asked for an unsecured loan:
Our company does not have a property.
The company’s directors have two properties. One is in a village where our bank does not have a branch.
The only property available with me is not registered with govt because the builders in Noida are broke and refuse to get the property registered.
So, we wanted a “high risk” unsecured loan.
The lesson learnt was “If you have a property, at least connect to a bank which has a branch near your property. Unregistered properties won’t mean a penny, even if you have paid the full amount for them”.
Unsecured business loans are not easy to come by. And when you are able to get one, you get it at an exuberant rate of 16 to 21% per annum. Not to forget the processing fees, insurance, investment, etc, etc the banks will expect from you before they give you a loan.
- The Bad CIBIL Score:
One of our old directors had a miserable CIBIL score which further added to the misery of our company’s credentials.
We had not updated our director list for years. Since the director was earlier with the company and now was nowhere active, we had to go back and get the name removed.
Maintain a good CIBIL score and remove the extra directors who move out from time to time.
- Filing a low ITR:
Your CA might tempt you to keep the profits low to save taxes or get a good TDS refund.
A low ITR is a reflection of the poor performance of business.
Banks talk only in black and white. You will not be able to convince them your growth story till your papers speak them clearly.
ITR is an important point for taking a loan.
Let me give you an example. Our company’s turnover doubled in last to last financial year and the profit hit rock bottom.
I had no idea (the typical marketing – techie guy) who hates looking at all this ITR stuff.
I went to banks thinking they will look at turnover. When they checked the ITR, they refused to fund us the amount we wanted.
- Avoid bounced cheques:
Our company had some hard and soft bounces as cheques for a year before we decided to raise funds.
This one was a bummer.
Do not allow cheque bounces to happen.
When we were in our growing stage, we had a part-time accountant. No one in the company knew where the cheques went and sometimes, cheques were given for encashment even when there was no cash.
When banks came back to us with questions on bounces, we had no answer.
It was sheer negligence.
Once the cheque bounced, he took the cheque back and had it bounced again.
We were going through a tough time. A lot of money was stuck with clients and our “prompt” vendor made the situation worse by getting the same cheque bounced.
We have stopped giving cheques. All payments are made via online banking now.
We recently raised a loan from two banks.
How we got new banks is another story.
We walked into few banks. Shared our banking financial and future projections with them
Showed them our progress.
Since our old bank had run us dry by scrutinizing our documents to the point of no return.
Our documents were in line and two banks came on board without hiccups.
The next time you deal with a bank. Remember, they need you as much as you need them.
It’s a line of business where they give us less interest and take double the interest when we take money from them.
This is where they make profits.
You just have to convince them with your balance sheets and ITRs.
For a new startup, there are schemes like MUDRA from Centre Government which can help you in raising the small amount of fund.
Although, it is a herculean task to get funded our govt schemes (one of the points I mentioned under my last articles My expectations from startup India)
You can try by finding some links in the government bank in your area.