Building Better Banking Relationships
Harold Lacy is a former banker, a financial advisor, and author of Financing Your Business Dreams With Other People's Money. He often joins me on The Small Business Advocate Show to help us get the most out of our efforts to finance our businesses as we work with banks and investors.Harold says your banker should be one of your partners. He and I go so far as to say that if you don't feel this way about your banker, you should find another one. Harold recommends a checklist to help you determine if you are working with a banker who is on your side. Here are a few of those points, in no particular order of importance.
What is your bank doing to provide value-added services?
Does your bank provide educational seminars on topics that will help you do a better job of managing and growing your business?
Are the products offered by your bank focused on what small businesses need, or do they seem to be designed more for the bank's convenience and success?
There are many other value-added examples, but you get the picture.
Does your bank offer back-up officers to stand in when your primary contact is out of the bank?
Have you been introduced to that person? You can't always count on having your first string banker at your fingertips when you need him. Murphy is alive and well in small business, therefore, the chances are excellent that a problem or opportunity will come up when your prime banker is unavailable.
I go one step further and recommend that the best way to insure that you have a back-up banker is to have more than one banking relationship. In other words, you find your own back-up banker in another bank. Harold agrees with me when I say that doing business with at least two banks is one of the most important financial steps you can take for your company.
Find out how, and if your banker is taking your total banking activity into consideration when your interest rate is established.
You have checking accounts, deposit accounts, savings accounts, CDs, etc., in your lead bank. Make sure that you know what value your banker is placing on your TOTAL relationship when setting your interest rate and loan terms.
Making loans is all about balancing risk and reward. When request a loan, the bank identifies the risk, and appropriate collateral is acquired. Now, how much should this loan cost you? The rate is a function of how much money costs the bank, the quality of the collateral, and the credit-worthiness of the borrower. If you have a deposit relationship with a bank, they should also take the availability of that cash into consideration when the rate is set.
Remember, if you have money in a checking account, your banker is not having to pay for the use of that money. You should be getting some consideration for those funds. Ask your banker what your average daily balances are. Sometimes, this is all you have to do to let your banker know you're a savvy customer, and they will "sharpen their pencil."
This average daily balance information will also help any prospective bank make a competitive loan proposal. But remember, if you give a bank this information, and if they use that to set your rate and terms, you have to be prepared to move your accounts.
Make sure that you know when your collateral will be released.
Banks have a tendency to get addicted to your collateral. Once they get it they want to keep it. And for some reason, once they have it, they take it for granted, and it isn't as valuable on a new deal as it was before it was pledged for the old deal.
If your banker is your partner, he or she will agree to specific performance triggers which, when certain milestones are reached, will release an incremental amount, if not all, of your collateral. You should ask for these "triggers" in writing before you sign the papers.
Harold says you have to do your part in this relationship, too. If you have a good banker who is acting like your partner, you cannot beat him up over a small interest rate premium. No one knows more than you that service costs money. A banker who is part of the solution and not part of the problem is worth a premium interest rate. Don't be "penny wise and pound foolish". You have to do your part in this relationship, too.
Write this on a rock... As long as you own a business you will be on a continual quest for a banking relationship that serves your company's financial requirements. The one you find today will likely not fit your company, for lots of reasons, one year from now. The financial industry is morphing very fast, creating both a fickle, and an agressive banking environment. Therefore, don't fall in love with your bank. They will serve you, and they will help you, but they will not, and indeed cannot, fall in love with you. Don't ever forget that!
