This story is the first part of a series about financial literacy for small businesses in the Ypsilanti area. It is made possible by University Bank.
Starting a business offers many exciting opportunities, like the ability to create jobs, the freedom to get creative, and the chance to be your own boss. However, an initial challenge for many business owners, new and veteran, is finding and obtaining funds. There are numerous requirements and pitfalls to consider when it comes to finding funds for your next business venture.
Start by setting the right foundation
Establishing a business (not personal) bank account and a business tax identity are good foundational steps. A business bank account helps to prevent the intermingling of personal and business finances. According to
Intuit Quickbooks, an accounting software company for small and medium size businesses, a business banking account can help you track expenses and keep better records of your finances. The right business account can also help you earn interest, which may be useful for savings or emergency funds.
But don’t expect to simply walk into a bank and open a business account at that moment without the proper paperwork. Your banker will want to see your employer identification number (EIN) as well as your articles of organization. Your articles of organization are the paperwork associated with filing your business in your state of residence. Your EIN is the number you receive when you register your business with the IRS, which acts similarly to a social security number for your business.
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University BankJori Knight.
"The specific documents needed are also dependent on the type of business that you have," says Jori Knight, branch manager at the Ypsilanti office for University Bank. "So if you have a corporation or you have a nonprofit or you have a sole proprietorship, those things are all so different and may require completely different documents."
Avoid common pitfalls that could derail your efforts
According to Mark Koepf, vice president and director of government guaranteed lending for University Bank, one of the biggest missteps you can make is financing your business with credit cards. He says this often happens because new business owners "don’t think they are ready for a banking relationship or somebody told them to just bootstrap it and get it off the ground."
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University BankMark Koepf.
"A lot of times, by the time they contact a bank they are in a financial position that’s difficult to climb out of," he says.
Another major mistake that many business owners make is failing to separate their business expenses and revenues from their personal transactions when filing their taxes. This often leads to presenting an inaccurate picture of their taxes to the IRS as well as their banker. This can make a business appear unprofitable when it is profitable, or vice versa.
"[When this happens] it's impossible for us to then say that it's profitable or not profitable, or to help them with financing," Koepf says.
Another crucial pitfall for businesses to avoid is failing to monitor your finances regularly even when things are going well. An article from
Forbes.com highlights that "Monitoring and analyzing your finances regularly " is essential because it "helps identify financial issues early on, such as cash flow challenges, declining profitability, or unexpected expenses, so you can take care of your finances before things get out of hand." Regular and detailed monitoring of your business’ finances not only helps you stay ahead of potential problems but also makes it easier for your banker to understand your needs and better assist when seeking funding.
Establish a banker relationship
Every business and every business owner is different, which is why it is so important to have a relationship with your banker. Even with all the proper documentation, it is important to make a plan and have someone you can turn to through the preparation, retrieval, and maintenance of funds for your business.
"The best way to obtain funds from a bank is creating a relationship and working with your banker," Koepf says. "Regardless of however long it might take to put together your business, your plan, or to find a business to purchase."
An important thing to remember is that it is never too early to establish a relationship with a banker. In fact, Koepf advises that you start talking to a banker even before your business is up and running.
"I work with a lot of people who come to me with just an idea, without really being in a banking or financing position at the time," Koepf adds. "We try to be partners with the business owners so we can point them towards resources that are available to help them."
A relationship with your banker can also provide you access to information and organizations that will help you plan and grow your business throughout its life cycle. Steps like generating financial projections, creating a business plan, and connecting you with other business owners are much easier to take with the right support from your banker, and according to Koepf, partnering with a local community focused bank makes it much easier to take these steps.
Larger banks are likely to have more locations and be easier to get to, but they are often much less accessible or personally invested. Koepf recalls reaching out to clients during the COVID-19 pandemic to check in on them and see how they were doing, as well as ask how he could assist them through the difficult time.
"On the flipside of that, we had a whole lot of customers come to us that were not customers, but they were customers of big banks, and they couldn't get in touch with anybody. They felt like there was nobody in their corner to help them," Koepf says.
Knight echoes this sentiment.
"[Larger institutions] are dealing with a lot more people," Knight says. "The attention to detail and that feeling of not just being a number is very much felt at a community bank because you get that personal time and attention."
Additionally, with the right bank and banker you may be given access to even more opportunities and information for your business. There are numerous aspects to starting and owning a business, and it can be helpful to have resources even outside of your bank. Koepf says the most important advice he can give is to build up your community.
"Do not try and work through it on your own," Koepf says. "There’s all sorts of resources available if you look for them. Your community bank is probably the best place to start."
Koepf emphasizes the importance of personalized support for small business owners.
"I think when you’re a small business or starting a business, you really want somebody that's going to give you the time of day, to listen to what your needs and concerns are, and to best help you, whether it's with them or pointing you to another resource that is specialized in helping," he says.