Is It Time to Deposit Your Bank?
OPERATE - OCTOBER/NOVEMBER 2012
Switching banks might be a pain-in-the-you-know-what.
But, despite the hassle, changing banks can pay dividends.
· One-quarter of small businesses have changed banks in the last four years.
· When shopping around, look beyond rates and fees and consider intangibles like service and proximity.
· Owners are finding lending decisions are no longer made at local branches.
For more than 25 years, NFIB member K.Q. Allen ran her Lincoln, Neb., pet care facility with the help of her community bank, where she held $1.4 million in loans,
lines of credit and both business and personal accounts.
Then, last fall, she noticed some unsettling changes in the relationship: The bank wasn’t being attentive to her estate planning needs, was turning out sloppy paperwork and, at a time when interest rates were falling, only offered Allen the same interest rate as her business loans.
“I had an excellent relationship, except I started feeling I was not the priority I should have been,” Allen says. “When someone has $1.4 million invested in loans with you, I think it’s in your best interest to see if you can’t do a little better, especially in today’s economic and challenging times.”
Allen decided it was time to take her banking needs elsewhere. “The biggest thing holding me back was the time-consuming process of transferring all the bank records and business documents, but [in the end] it was well worth it,” she says. “My advice is, don’t be afraid to go out and shop around.”
Like Allen, an estimated 27 percent of small businesses have changed banks in the last four years. Of those who switched, 38 percent said they felt mistreated by their prior bank, and 36 percent said they found better financing from another bank.
With the economy limping along and new financial regulations taking effect, the way small businesses approach banking is changing. For the “too big to fail” banks, service has become less personalized and fees have increased, both in number and amount. Small community banks, too, are grappling with the new rules and squeezed profit margins that have altered the local lending landscape.
John Golden, president and CEO of Omega Performance, a consulting firm that offers credit and financial training to banks, says that while most banks have identified the small business sector as an area in which they want to increase lending, their approach is not always the right one.
“They lead in with their products, asking questions like, ‘What services do you currently have? What rates do you currently have?’” Golden says. “Instead, they should first understand how a small business client runs its operation—and how they can help.”
It’s true that if your needs aren’t being met, it might be time to shop around for a better banking relationship. But with much of the banking landscape changed since you last opened an account, you’re probably wondering what your options look like. We talked with several small business owners who recently switched banks to find out why and how they made the change, and what advice they have for other owners.
Keep It Local: Choosing a Small Bank
Other local bankers who wanted Allen’s business had approached her over the years about switching banks. So when she decided to cut ties with her bank last fall, she wanted to keep her business with another community bank that had roots in Lincoln. “I like working with a locally owned bank because they offer the same
avenues to do business as any big bank, but I think the service is better,” she says. One banker had been particularly persistent, so she called him to see what he could offer in home loans.
A bidding war erupted with her current bank after the challenging banker offered to lower the interest rates on all her loans by 2.5 percentage points. Even though her old bank agreed to match the offer, she decided to move everything to the new bank. “It was only because the new bank was willing to give me such a good deal that my old bank agreed to offer anything,” Allen says. “Why weren’t they willing to do it two months ago?”
She hasn’t regretted her decision to switch—or to stay local. When her new bank was courting her, the bank president came along for the sales call to her office, where he immediately offered a guarantee for a house loan.
Allen was impressed by the hands-on approach. “They did a good sales talk, but were genuine, sincere and put me at ease.” Even after the paperwork was signed, her new bank’s staff kept checking in, calling Allen to ask if there was anything else the bank could do. “I wasn’t just a meeting that was then dropped once the transaction was done.”
Allen warns to keep in mind that small banks can have a more personal touch, but they require just as much paperwork. “We had to dig out all our business documents, bank records, tax forms and other paperwork,” she says. “We went through a business evaluation process with a lot of footwork, but this is the information that any bank has to have. A small bank wants to know they’re taking a good risk. So there were still a lot of hoops to jump through, but well worth it, and I have hopefully found another bank to take us into the next generation.”
Big Time: Moving to a Larger Bank
But when it comes to banks, smaller isn’t always better. Besides multiple branches nationwide, larger banks are often better equipped to offer ancillary services that matter to small businesses, like cash management services, letters of credit for exporting, and corporate credit cards that can be used for financing.
When NFIB member Adam Miller bought The Manufacturers Equipment Company, an engineering firm that also makes specialty wire products for the construction industry, in 2005, he used a mid-market regional bank to get a line of credit, a real estate loan and an unsecured loan to make the purchase.
For years, the relationship was smooth. Then came the housing crisis and financial meltdown in 2008. MECO, based in Middletown, Ohio, lost money because its customers, mostly in the construction industry, were affected—but Miller never missed a loan payment. That year, however, the bank took away his ability to hedge exchange rates, meaning he would lose money if the U.S. dollar continued to weaken. “I regularly do business using Euros [when purchasing European equipment], but the bank never gave me another option,” says Miller.
In late 2011, the bank also said it was taking the balance in his credit line and converting it into a loan, right while Miller was in the middle of a $1.4 million project. “They thought I didn’t have the cash flow to make payments, plus they didn’t like the line of business I was in.” By taking away his credit line, the bank hampered Miller’s ability to finish the big project by limiting his cash flow.
So Miller went to the bank for a discussion. Part of the debate revolved around MECO’s financial statements. The company practices accrual-based accounting (revenue is recognized when products are delivered instead of when the cash is actually paid), because it minimizes the business’ overall tax impact at year’s end.
But while looking over MECO’s mid-year statement, the bank said that method was wrong: MECO was losing money, the bank said, and should switch over to cash-based accounting. Miller was astounded. “I asked if they really knew how a small business worked,” he says. “They wanted me to switch to cash-based accounting so that I would maximize profits, but really [I think] they wanted their calculations to look better. That meant I had to pay more in taxes, my cash flow would be worse, and therefore my ability to pay their loan would be worse, too.”
Miller and the bank agreed to disagree. The bank would give MECO its line of credit back, and the company would have to close its account within six months.
Miller started interviewing other banks, based on recommendations from other business owners. The main requirements: The new bank had to pick up his real estate loan, offer a revolving line of credit and handle Euros for his account. After talking with his wife, who works in banking, and other small business owners, Miller contacted six banks, and soon had two of them competing for his business.
Miller ended up choosing PNC Bank, a national outfit that is much bigger than his prior bank, because he was won over by the breadth of services—and lower rates—it offered. “They raised my line of credit to a higher amount, decreased my monthly fees, gave me the ability to lock in exchange rates again, and reduced a number of reporting requirements the other bank made me do. And they worked fast, getting everything done in two weeks.”
Since MECO opened its accounts last February, the relationship with PNC has been a good one. “They know housing has not improved, and that we’re biding our time,” Miller says. “But I just talked to them recently about a concern, and the reply was, ‘If you’re happy with us, then life is good.’ It was a brief conversation.”
Miller recommends selecting a bank that not only wants your business, but also takes the time to understand your company. “My old bank had no interest in the products we make, but PNC is very aggressive in getting manufacturers as customers. It’s a matter of finding the bank that’s also most interested in your actual business.”
Mix It Up: Doing Business with Multiple Banks
Sometimes, having just one bank might not be the right way to manage your money. Placing your funds in two or more banks could give you more protection against transactions gone awry, and could even improve the way you balance your books.
It did for Paul Fronczek, an NFIB member who owns Abbey’s Home Furnishings in Georgetown, Texas. A cyber security breach in early 2011 made Fronczek change the way he approached banking.
Like most retailers, he uses a merchant service to process credit card payments. He had those payments wired into two accounts at two different big banks. But one weekend, one of those accounts was hacked from overseas, with every penny withdrawn as credit card refunds. The bank called Fronczek to tell him his account was overdrawn, so he alerted the second bank, which apparently did nothing—that account was hacked into the following weekend, too.
Fortunately, both banks returned his money, but he was forced to cancel all his credit cards and bank accounts. The aggravating ordeal made Fronczek take a step back and re-evaluate his entire banking approach. Instead of deciding to narrow his business to one bank, he decided to go the opposite way and choose three banks, each one handling a different aspect of his business.
At Bank No. 1, a national bank, Fronczek has two accounts, one where his credit-card deposits go every morning, and another for his operations account, where the card deposits eventually roll over. Bank No. 2, another national bank, handles Fronczek’s wire transfers and online bill payments. And Bank No. 3, a smaller, local bank, handles an account where he puts money for state, federal and payroll tax payments.
Fronczek now feels comfortable with his money spread across several accounts, and balancing the books is actually much easier. “Before, I had trouble remembering whether it was a credit card, cash or check transaction,” he says. “Now I know Bank No. 1 handles all my credit cards, Bank No. 2 handles all my tax stuff, and Bank No. 3 is where my cash goes. It’s easy to figure out what’s coming in from where, and be able to trace it.”
He recommends other businesses use multiple banks of multiple sizes. “There are so many security breaches now; don’t put all your eggs in one basket. Put your money into little piles, because then you won’t be hit so hard. Remember that if your account is breached, you don’t have access to it for two or three days while the bank [remedies the problem].”
No matter the size of your business, or what industry you’re in, a strong banking partnership can help you prosper—and keep you honest. Before you decide to make a switch, get references from other business owners about what banks they use and like (and don’t like). Ask specific questions about what these banks can offer you, and evaluate in detail whether your business and that bank are a good fit.
“Go beyond the laundry list of customer-friendly features we’ve all come to expect by now,” says Golden, the bank consultant. “Look for the bank that will think like your CFO.”
3 Ways to Find the Right Banker
A strong banking partnership can make all the difference when running your small business. But how can you start that relationship on the right foot? John Golden of financial training firm Omega Performance has three suggestions for what to look for in a banking suitor—and what you should do to be a good partner.
Look for the Right Fit. The ideal banker is one who takes an interest in your business. Before the initial meeting, your suitor should have done some research into your industry so he or she can ask questions about your business needs, and also suggest opportunities that can help you manage your business more efficiently.
Heed Warning Signs. It’s clear a banker won’t be a very good partner if the first and only questions they ask are cookie-cutter, such as “What’s your current loan rate?” or “Where do you bank now?” That’s all the concern about your financing needs you’ll ever get from this loan officer, Golden says.
Make Yourself Attractive. As a prospective client, you need to show some dazzle yourself. Be knowledgeable about your business finances so you can effectively answer a bank’s questions about your business plan, operations structure, inventory management and other factors it needs to consider before becoming your partner.
The State of Credit for Small Biz
There’s no doubt about it: Since the economy went into a tailspin, credit is harder to secure. Before the recession, banks’ underwriting standards were so lax that it seemed like anyone could get a loan. Now, their requirements have returned to more sensible levels.
Based on media coverage, it seems like big banks are still denying credit to small businesses. But that’s not true, says NFIB’s chief economist Bill Dunkelberg.
“There’s just no demand for credit; small businesses aren’t asking for money,” he says. That means banks are sitting on excess reserves of $2.5 trillion, a record high.
In a recent NFIB member survey about satisfaction with their banks, a mere 30 percent of business owners said all their credit needs were met, and 7 percent said they weren’t fully met.
“But everyone else said, ‘Who wants a loan right now, anyway?’” adds Dunkelberg, who is also chairman of Liberty Bell Bank in southern New Jersey. “That correlates with their pessimism about the economy and sales—they don’t see either improving right now. So while banks won’t turn down a good loan, no one is coming in to ask for them.” – V.R.