Banking on Success
How can you find a good banker—and then maintain a good relationship with him or her? Ask lots of questions.
BY WILLIAM GURSTELLE
At first look, most banking institutions seem remarkably similar, and indeed, they are—at least from an operational point of view. But talk to any group of experienced business people and you’ll hear a wide variety of opinions regarding the suitability of a particular bank for a particular business.
So, how does the astute business owner select and then maintain a good relationship with a bank or financial institution? Those are important questions. Finance is, after all, the grease that lubricates the gears of commerce. And the better the grease, the more smoothly your company’s gears will turn.
Finding the right bank and finding that key individual who can act as a trusted and dependable member of your advisory team is critical. It’s a big decision—and one that deserves as much consideration as choosing an accountant or an attorney.
So, get ready to put in some time. The decision requires you to analyze a number of different attributes, and not every business owner will weight them equally. With that in mind, here are seven important concepts to consider when finding a banker and working with that individual successfully and harmoniously.
1. What services does the prospective bank provide that are important to you?
The related question: Does the bank’s portfolio of services include everything your business needs? Loans and checking accounts are the two services that co me to mind first when banking is considered. But those are only a small portion of the overall scope of services offered. Rick Beeson, president of Park Midway Bank in St. Paul, points out that technology is an important consideration when choosing a financial partner because it drives its service offerings these days. “Banks need to be strong in technology,” he says, noting that you should give particular weight to their online programs. “Are you able to move money between accounts, make stop payments on checks, view checks, and order checks—all online?”
Steve Erdall, president of St. Paul-based Western Bank, says banks need to offer a wide spectrum of services. “Banks should provide checking accounts, letters of credit, savings accounts, profit sharing accounts, and so forth,” he says. “And as we talk with customers regarding their future plans, bankers are able to provide a lot of advice because we also have information about what their industry does, and we can show them how they are performing [compared to] other companies in their industry. There is also a lot of general advice we can give—helping with buy or lease decisions, recommending professionals such as accountants, and even assisting with human resources problems.”
2. Ask your current or prospective banker if he or she is familiar with Small Business Administration (SBA) and community-based loan programs.
The ability to borrow money is an always-critical component. Of course, not all businesses choose to fuel their growth through debt. While additional capital may allow increased investment in machinery and other revenue-producing assets, accumulating debt may not jibe with the inclinations of conservative business people. But those who never borrow money are probably in the minority. Depending upon your size, history, and financial needs, it’s often important to consider how knowledgeable your banker is about SBA and community loan programs.
“If you own a small business in need of credit, you should choose a bank with a history of activity with SBA programs,” says Beeson. “It’s important to find out the bank’s experiences with SBA and other economic development programs.”
Besides the SBA, there are many Twin Cities-area organizations that assist business owners in search of funding. They include funding sources such as the Minneapolis Community Planning and Economic Development Department, the St. Paul Department of Planning and Economic Development, and the St. Paul Port Authority. Both Minneapolis and St. Paul also provide business resource centers that provide valuable advice on regulatory questions, space availability, and city processes for various industries. And, within the larger cities in the area, there are neighborhood-based nonprofit community developers that offer assistance to startup and existing small businesses. These groups can help develop a business plan and forecasts, review lease terms, and obtain loans.
Those banks that are the most experienced and participate most often qualify for the SBA’s Certified Lenders Program or Preferred Lenders Program, which allow them to offer fast turnarounds on loan applications. SBA-certified banks also have authority to approve some loans themselves, so applicants to those banks receive a response on their loan guaranty applications from the SBA typically within three days.
Preferred SBA lenders also have full authority to approve SBA loans. They submit applications to the SBA only for an eligibility review, on which they receive a quick response, so turnaround time on requests can be as short as a single day.
3. Find out how the bank makes decisions.
Western Bank’s Erdall advises business people to find out as much as possible about their commercial banker’s loan process: the details of the process, how long approval takes, and how much authority the individual banker has. “Find out if the loan policies are predictable and consistent,” he advises. “What rules and stipulations come with the loan? And, are decisions made by individuals or by committees?”
Greg Burger, chair of the Edina-based Minnesota Banker’s Association, says a common approach is to use a combination of inputs to determine loan approvals. He adds, however, that loan approval practices can vary widely between banks. At some banks, he says, individual bankers make decisions as to whether loans are approved. In others, a committee approach is used.
In general, it’s to your advantage to find out up front about your prospective financial partner’s approval process. By doing so, you’ll have a good handle on estimating how much credit you’ll qualify for, anticipating how long approval takes, and knowing who the key people are with whom to cultivate a relationship at the bank.
4. When first entering into a relationship with a bank, who will be your primary contact, and what does that person already know about your company?
According to the MBA’s Burger, who is also president and CEO of the Minnwest Bank of Luverne, a customer’s primary contact with his or her bank is the calling officer. Burger notes that bank calling officers come in all styles and temperments, and have differing degrees of knowledge and experience. The more knowledge the bank has about your company and your industry, the greater its value. It’s to everyone’s benefit if you and your bank develop a good relationship. The calling officer is the “point person” in the process who determines who gets loans and at what interest rate.
5. Do you carry a lot of cash in your accounts?
Some companies, by the nature of their business, accumulate and hold large amounts of cash. For those, the interest paid on that cash held in bank accounts is an important factor, as even small differences in rates can have a sizeable impact on the company’s bottom line. For cash-heavy operations, it’s an extremely important question to ask. It’s also important to compare the answers between institutions.
6. Will you be able to communicate effectively with your banker?
Park Midway’s Beeson says companies need to provide timely and accurate financial information and share it with their bankers. The goal is to effectively communicate the plans of the business.
Avoiding unpleasant surprises is of paramount importance.
A bank’s lending officer certainly does not like to be embarrassed by a sudden bad turn of events with one of his or her customers. So, share financial information, both positive and negative, and interpret significant developments with the bank as they occur.
In return, your banker can share benchmarking information about your industry, such as trade association performance reports and government data. In all cases, avoid end-of period financial statement surprises resulting from failure to record transactions on a timely basis.
7. How will the bank respond if your company comes across a rough stretch?
Most banks will require their loan customers to adhere to certain financial requirements while loans are in effect. These requirements are written into the loan documentation and are called loan covenants. When business is good, they are of little concern. But what happens if you fail to stay within them?
Loan covenants typically prescribe financial ratios that the borrower must maintain to remain in good standing with the lender. A breach of the covenants may require you to pay additional fees to the bank, and may cause an elevation in the current interest rate, or perhaps, even more serious consequences.
The experts note that if the business’s accounting records show that it strays outside the ratios, a number of things can happen. “Probably, the loan document says the loan goes into default,” says Erdall. “But in practice one of three things will happen. In the worst case, the bank may, in fact, call in the loan. Somewhat less seriously, the bank may adjust the interest rate. And depending on other factors, the bank may not do anything.”
Often, if the reasons behind the variance are explainable and temporary, the bank will simply wait for the loan to come back into compliance with the agreement.