A bank you can bank on--8 tips for seeking a new bank

By J. Tol Broome Jr.

One of the myths arising from the economic downturn is that banks have lost interest in lending to small businesses. The fact is that many banks are actively looking for opportunities to develop new client relationships.

The primary cause of the Great Recession was that the huge housing bubble burst. In most areas of the country, developers overbuilt, residential real estate values plummeted and foreclosures reached record levels. As a result, banks are stuck with the residue (i.e., slow–moving housing inventory). As they work to reduce real estate exposure, banks are looking for other profitable sectors and a key focus for many is the small business arena.

A recent article in the online business journal The Street (www.thestreet.com) described the availability of small business loans as “ample” and said, “banks are expanding small business operations to drum up new business.”

Despite evidence to the contrary, many business owners remain skeptical about the willingness of banks to lend. Some have been declined for loans, while others may feel neglected by their current banker.

If you count your business in either of these groups—or if you aren’t sure your bank is equipped to grow with you—now is the time to consider finding a new bank for your business.

Here are tips for seeking a new bank:
1. Ask for input The first step is to see what options are available. Even the smallest towns typically offer several banking options. Start with a Web search of banks in the area to determine what each offers. Talk with your attorney and accountant to see which banks they would recommend as a good fit for your business. Another great source of information is other business owners, who can share experiences they have had with various banks.

As you talk with other professionals and business owners, ask if they would be willing to introduce you to bankers. Lawyers and accountants typically deal with several banks and other business owners often have a close relationship with their own bankers. A warm referral is better than a cold call when meeting a banker for the first time.

2. Avoid problem banks While you’re conducting your research, check out the financial health of the banks you’re considering.

One of the unfortunate consequences of the collapse of the real estate market has been a dramatic increase in bank failures nationwide. In 2008, there were several well–publicized failures of large banks, including Washington Mutual, Indy Mac and investment bank Lehman Brothers, but they were just the tip of the iceberg. In 2009 and 2010, more than 300 U.S. banks failed—a staggering number. And the current list of “sick” banks is reported to be in excess of 500.

A troubled bank tends to be inwardly focused and many must shrink their loan portfolios to meet required capital levels, detracting from client service.

How can you find out if a bank is in trouble? First, see if the institution received money from the federal Troubled Asset Relief Program and whether or not it has been repaid. Unpaid TARP funding doesn’t necessarily portend problems, but it is something to consider in your decision–making. Second, because many banks are publicly traded, you should be able to obtain the latest 10–Q information reflecting the bank’s financial performance. Recurring losses, low capital levels and a shrinking balance sheet could indicate significant problems.

3. Check your personal credit rating If you are a small business owner, a bank will consider you and your business alter egos and your personal credit rating will be closely scrutinized by a new financial institution. If you don’t pay your personal bills on time, the banker will assume that you will be late paying business obligations, as well.

Credit scores are computed by three primary credit agencies: Equifax, Experian and Trans–Union—all can easily be checked online. Find out your personal credit score before you get too far down the path of seeking a new bank.

The higher the credit score, the better. The average score in the United States is 693. Credit scores are determined by five weighted factors: timeliness of bill payment (35%), outstanding credit (30%), length of time the credit has been active (15%), types of credit (10%) and acquisition of new credit (10%).

If your score is low, it may be because of inaccuracies. If you find mistakes, the Fair Credit Reporting Act gives you the right to dispute or explain them. Even if there are no mistakes that cause your score to be low, you can strengthen it over time by focusing on improving the five score components.

4. Focus on cash flow If your credit score is solid, your next area of focus should be cash flow. Banks won’t loan money unless you can demonstrate an ability to repay it—and small business loans are repaid primarily from cash flow.

Virtually every business suffered cash flow problems during the prolonged recession. Some companies failed, while others struggled to survive. The fact that you’re still in business provides some proof of the resiliency of your venture.

A net profit is the best proof of positive cash flow, but there are other factors on which to focus. Not only do the inflows of the business need to cover all expenses, they also must meet all debt payments, as well as increases in inventory and accounts receivable not financed by trade payables.

If your cash flow has been negative and you have been forced to use personal resources or support from outside investors to keep the doors open, don’t give up on finding a new bank. Analyze your business for potential cost savings, debt retirement and inventory reductions to improve cash flow. A well–supported analysis that demonstrates positive future cash flow as the economy improves could be the difference between a “yes” and a “no” if you seek new financing or refinancing.

5. Put it in writing While it may not be necessary to write a full–blown business plan, you should provide a synopsis of your business and the financial services you seek, particularly if loans are involved.

The introduction should include a history of the business (longevity and reputation mean a lot to bankers), a list of major milestones, background and experience of the owners/key management and an explanation of the ownership structure. Following the introduction, include an analysis of your market and major competitors and explain what makes your business stand out. A SWOT analysis (strengths, weaknesses, opportunities and threats) can be an excellent way to present this information concisely.

If, like most businesses, you have been through a difficult period financially in recent years, explain how your company has survived and what you are focusing on to improve performance. This is a good place to summarize your cash flow analysis.

Finally, you should outline the financial services you seek. If you are requesting a loan (even if it’s a refinance of existing bank debt), explain the terms you’re requesting and how the loan will improve your business. Bankers like to see specifics—it demonstrates that the owner has a good understanding of the impact of debt.

6. Be an open book Along with your narrative, a banker is going to want to see financial records. Expect to provide at least three years of accountant–prepared financial statements or tax returns for the business, as well as current personal financial statements and tax returns for the owners. If you have interim financial statements (i.e., for the three– or six–month period following your fiscal year–end), include them. As the economy continues to recover, your interim financial information is likely to reflect corresponding improvement in your company’s performance. This will help build your case.

Be prepared to provide additional information as requested by the banker as part of a loan application process. Follow–up information might include schedules of accounts receivable, inventory and accounts payable; checking account statements; and asset appraisals.

7. Ask about SBA loans The U.S. Small Business Administration guaranteed loan program is used by many banks to extend financing that otherwise might be considered marginal or even unacceptable. The way the program works is the bank extends the loan directly to the business with the SBA providing a guaranty for a percentage of the loan—as high as 85% for loans of $150,000 or less. The program has been expanded by the federal government to cover higher loan amounts (up to $5 million), reduce fees on a temporary basis and allow more flexibility in refinancing existing debt.

An SBA–guaranteed loan might be the best option for your business. A small business can qualify for a loan even with insufficient collateral, as long as cash flow can be documented to cover repayment. And the allowable loan terms are longer than those typically available for conventional loans. For instance, an equipment loan can be extended for as long as 10 years, compared to five to seven years for conventional financing.

You will need to do some homework to find out which local banks participate in the SBA program. Rankings are published and can be found online. You also can contact the SBA directly and ask for a list of banks in your market. To learn more about the SBA, check www.sba.gov.

8. Become a multiservice client Just as you seek to cross–sell as many products and services as you can to your customers, banks focus on multiservice client relationships in their business development efforts.

In addition to loans and deposits, many banks offer dozens of financial services, including credit cards, debit cards, cash management, online banking and automatic bill pay. Some banks offer trust services, plan administration (such as 401k), brokerage and investments. Others sell insurance. Your new bank will want the opportunity to work with your business and with you personally. The more services you are willing to buy from your new bank, the stronger relationship you will have.

Many banks are hungry to establish new small business relationships. Now might be the right time to find a new financial services provider for your business.

J. Tol Broome Jr. has spent nearly 30 years working in commercial lending at various financial institutions and currently is an executive vice president and manager of the Specialized Lending Group at BB&T.
~~~
Please link to this page: Eight Tips When Switching to a New Bank

Related Posts

Innocor Relocates HQ to Red Bank

Innocor Inc., a supplier of flexible polyurethane foam components...

Mixing business and pleasure

If you travel for your job and sometimes spend...

Protecting your company’s online bank account from fraud

Quick. Easy. Efficient. Who doesn’t love online banking? Beware,...

CKI Solutions builds hospitality business

Cadence Keen Innovations Inc., which does business as CKI...