How to Choose a Bank for Your Small Business
Believe it or not, a lot of smaller companies will spend more time shopping for a piece of office equipment than they will for a bank. It’s surprising, and concerning.
As a small or medium sized business owner, or the person responsible for the financial affairs of your firm, you have countless decisions to make, especially when you’re starting out or feel your business has outgrown your present bank. Selecting the right banking relationship can be critical to your business and you may not know your decision was poor until you really need your banker. In my experience this decision could mean the difference between success and failure of the business.
Whether your needs are simple or complex, choosing a bank requires a thoughtful analysis of your specific business’ needs and should not be made on a whim, or based on relatively unimportant factors like location and whether the bank offers free a checking account.
As one who has been through this exercise many times before here is a list of items to consider when looking for a new banking relationship.
- Should you Choose a Local or Big National Bank?
There are both benefits and drawbacks to local and national banks. What you need to decide is what works for your needs. If you are investigating a local bank, determine their lending limit. You do not want to be the largest borrower because you will face extra scrutiny and may outgrow the bank as your business grows. This means that if you choose to go local, ensure the bank represents other, larger borrowers.
Are the decision makers local for your loan? If not you may have some person in a different time zone determining whether or not your loan is approved.
In addition to the lending limit, determine whether the banker you choose has the approval authority for your account, or whether they have to go to someone higher up, or even another office. Typically, even with a larger bank, they’ll have a local market limit and then will have to go to a regional or national level for approval. The importance of this can’t be understated because your ability to sit down with the decision maker and his credit analyst is vital to achieving a level of understanding that is not possible with some unnamed person you have never met sitting time zones away. Building a personal relationship is the most important factor in determining success with your banker.
- Relationships are Key
Having a good relationship with your banker or loan officer is extremely important. With that in mind, you’ll want to find someone who preferably knows your business, industry, and market; or at the very least is generally interested in understanding it. When interviewing banks make sure they have experience banking with similar companies. Ask them for a reference and call that company to see what their experience has been with the bank.
Make sure you like the people you will be dealing with and they seem genuinely interested in working with you to grow your business. At the end of the day, a good working relationship will mitigate some of the banking issues that may come up, such as technical issues in a loan document, and might even cause your banker to put in the extra effort when you need something on short notice. Also, it will vastly speed up the time it takes to get things done; not to mention help you avoid the onset of a migraine whenever you hear the bank’s name mentioned.
- Competition Produces Reduced Borrowing Costs and & Account Fees
When you’re looking at the interest rates that may be charged by your banker, it’s no surprise that small banks or credit unions can be more competitive. For middle to larger companies borrowing costs can get very low if the firm has good cash flow and is not highly leveraged. Pricing may be based upon LIBOR (London Inter-Bank Offered Rate) plus percentage points, depending upon your credit and cash flow.
At smaller banks, treasury management fees may be lower and pricing more flexible to meet your company’s specific needs. However, larger banks have tools to allow your firm to transact business globally seven days a week. This is where you need to make sure you carefully match your needs with a bank’s capabilities. Also, consider the integration with your accounting systems for electronic payment, automatic cash receipt application and foreign exchange. We frequently see these transaction items left out of the analysis and a few dollars in savings on bank fees may create problems in accounts payable when the work doubles due to lack of integration with the AP or AR systems.
Annually, treasurers are surveyed by Greenwich Associates on account analysis fees and other treasury fees. Obtaining a copy of this report is a great resource when looking at the non-lending side of your bank cost equation. The Federal Deposit Insurance Corporation (FDIC) also has lots of data on banks (available here: www.fdic.gov/bank) that can help you determine if your bank can weather economic turmoil. A weaker bank could cause your company numerous problems if it fails.
In addition, remember that there is no substitute for competitiveness of the marketplace. Getting three or four banks to bid for your work is a manageable number. If you are a borrower you will likely be forced to park your cash at the bank you choose, so it pays to carefully evaluate these capabilities separately from borrowing cost. The more competitive the market, the more basis points you can knock off your first offer. This is particularly true in the energy sector where bankers typically throw money at borrowers due to the lower risk of the industry.
- Small Business Administration (SBA) Loans
For smaller companies, you might want to consider finding a bank that is comfortable working with the U.S. Small Business Administration (SBA). SBA loans are federally subsidized loans that help protect the banks (think of it like a co-lender with your local financial institution). There is more overhead in obtaining an SBA loan, but if a bank will work with SBA this is beneficial because SBA is designed to assist small businesses in obtaining financing that they wouldn’t be able to obtain on their own.
- Are there any extras?
Last, determine if the bank offers any extras. For example:
- Do they cover all your small banking needs, such as offering different types of checking accounts, zero balance, sweep accounts, etc.?
- Do they have corresponding banking or affiliate relationships across borders?
- Do they offer privately branded credit cards, discounts to employees for checking accounts, or equipment leasing?
- Are their systems capable of electronic, international and secure transactions? (Note: smaller banks may use third party technology so it pays to ask.)
- Do they offer wholesale lockboxes?
- Do they offer letters of credit if dealing with importers/exporters?
Choosing a bank is not an overnight process, nor should it be thought as a trivial task. It does not have to be overly time consuming, but it is an important process that can help your company prosper and grow. Carefully selecting a supportive and reliable bank is far more important than that piece of office furniture, so spend the time necessary to find the bank that meets your particular business needs. This may just help you avoid a lot of pain and suffering later.
Do you have particular questions or concerns about your specific banking needs? Feel free to reach out, I’d be happy to discuss them with you.
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