The Right Business Banking Decision Matters: Here’s How to Get It Right
Need to fuel growth, to launch new initiatives, pay for equipment, or hire skilled professionals? Rewind a few years: the bank’s answer may have been a resounding “No.” Wary of lending, they clung to cash reserves. As the economy recovers, however, they know that loans drive profits. The stigma of write-offs from 2008 and 2009 may have sharpened the pencils of some bankers, but in general, capital ratios have improved, and banks want to put their cash to use.
How do you choose which bank should put its cash to use for your business?
A Roadmap to Attract Lenders to Your Funding Party
The commercial real estate and residential mortgage disaster rocked a number of banks, and a number are still feeling the aftershocks. Choose banks that are well capitalized and interested in your business before requesting proposals.
With that word of caution out of the way, the next step is answering the following questions to determine your needs and how a bank will best support them:
- How much financing do you need to grow your business?
- What forms of financing and services are you looking for? Some of the services to consider include a line of credit, term loans for general corporate purposes, loans for real estate or additional equipment acquisitions, and credit lines that would support cash flow issues.
- Do you have the collateral or cash flow to support future projected needs? The answer to this question helps determine the extent of credit your business can handle.
- What other value-added services or products can the bank provide? These “extras”— e.g. cash management, pension plan administration, merchant services—can enhance the bank’s return and excite more interest (no pun intended!) in your account.
Answering these questions allows you to identify the types of loans and services you need from a bank. The approach to the bank should also include details about your company, such as the business plan and financial expectations for the next several years.
When the lender understands how you operate, they can address your specific needs and make suggestions that fit your unique situation. The time invested in communicating your needs and business operations to the bank will provide a return many times over.
Pricing is important, but not the only criteria.
When you hire an employee, “fit” matters. Choosing a bank is no different. Is the bank the right fit for your company and its needs? If, for instance, your activity is local, consider opting for a community bank. These institutions are well positioned to serve local businesses, and you won’t get lost in the shuffle. Typically, they are prepared to dedicate more human resources and time to satisfy your needs.
If, on the other hand, you have a national or international footprint, the added services and sophistication of a national or global bank shouldn’t be underestimated—or overlooked. In addition, larger banks are usually able to offer slightly better pricing and more relaxed covenants.
To make the best decision for your company, consider measuring and weighing your key criteria to “score” the proposals received from each bank. Which banks are competitive and which are not? Once you have whittled down the list and answered the questions above the banks left on the list should present proposals to the owner and management team. This is a critical step for you and your team to get to know the bank and vice versa.
One final reality check
After the management meeting and the round of proposal revisions, take one final step. Call some local Chief Financial Officers and request feedback on the banks still remaining on your list. They can provide excellent information on and insight into the finalists.
The Takeaway for Businesses: A Quick Checklist
Banks are ready to lend. Make sure those you invite into the process will be around for the long haul and take these steps before your next financing:
- Decide how your business should be capitalized.
- Create a financial model to help you understand how the financing will reshape your business.
- Understand the type of bank that fits your business and pursue those banks.
- Establish what you expect from the bank not only in terms of facility size, term and pricing, but in terms of other services and resources they will commit to making your business a success.
- Develop a scoring sheet based on your needs to compare bank proposals; include relationship criteria and other services, not simply loan terms.
- Have each finalist bank present their proposal to you and your team.
- Use your local contacts to validate your results.
Banks need to put their cash to work; with this roadmap, you can ensure the bank you choose will do its best work for your business.
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