Banking on relationships

From the pages of In Business magazine.

If you think choosing a bank or credit union for your personal banking needs is tough, finding a financial institution for your business banking needs can feel even more overwhelming. With so many choices — and so many banks offering similar services — where do you even start?

The process can be daunting for a new small business owner, or one in the process of growing a business, but there are some tried-and-true rules entrepreneurs can follow to find the perfect financial fit.

“Ultimately the businessperson needs to be able to answer some basic questions,” says Mark Meloy, CEO of First Business Bank in Madison. “What do they want? What do they need? What do they expect from a banking relationship? What we deal in is the ultimate commodity — money. All the suppliers [banks and credit unions] have it, and they have as much as most small businesses need. It comes down to what products and services are going to be delivered.

“Business owners don’t usually get into business because they’re good financial stewards or great accountants,” continues Meloy. “They get into it because they have an idea or expertise that they’re converting into a means to make money. It’s very common in small business that the financial acumen of that business owner is okay, but often lacking in some areas.”

Here are five main considerations small business owners should take into account when selecting the right bank for their business.

1. Practice due diligence

What are you looking to do? Are you hoping to take out a loan or establish a line of credit? Do you want investment advice? What about other services banks offer, such as automatic bill payment or credit card processing? Having a precise idea of what you need from a bank will help narrow your choices.

First, make a list of the services you want. Are you looking for low fees, easy credit, an SBA loan, or a combination of these and other services? Now rank the items in order of importance, and start shopping.

At each bank, ask for the business banker — that’s usually the loan officer assigned to commercial customers. Talk through your priorities. Then ask two key questions: 1) How high a lending limit can they authorize without needing approval from a higher authority? 2) Do they offer SBA loans, do they like to make them, and what volume of them do they close? (If you’re serious about taking out an SBA loan, look for banks that are Preferred SBA Lenders and have the authority to underwrite and approve these loans on their own.) The answers will give you a good indication of how much the bank wants to work with you.

2. Compare small and large banks

It’s possible that big, national banks may offer more favorable interest rates and a wider selection of products, but smaller banks often have a more compelling interest in promoting local business growth. These local banks may be more amenable to granting a loan when it’s needed most.

“The big difference between a community bank compared to a large national bank is you get more of a personal touch, you get more of the attention that a small business needs, you get more face time, and you get the local decisions,” notes Jim Hegenbarth, president and CEO of Park Bank in Madison. “There’s an additional level of attention and expertise that you get in that a small business loan and relationship means more to a smaller bank than a bigger bank just purely based on the economics.”

Settlers bank Founder and CEO Tom Spitz agrees. “Small often has speed and agility as advantages over large. Banking is no different. I’ve worked for large banks and they tend to be process driven. We can make quick decisions and we regularly adapt new technology as it becomes available. We don’t have that large corporate process that tends to slow things down and make decisions take forever.”

According to Spitz, technology is one factor that has really leveled the playing field between small and large banks.

“There was a time when cash management or treasury management — the payment processing services — very much favored the large banks. That’s gone,” Spitz explains. “We do everything the biggest banks I’ve ever worked for do, and frankly we do it better and faster. The largest institutions may still have an advantage as it relates to international payments in foreign currency, but we have customers who do international activity that’s U.S. denominated and they don’t bat an eye.”

Hegenbarth says he always wants his business bankers to understand that from a business owner’s perspective they don’t bank with the bank, they bank with the individual because of the relationship that has developed. “As a small business owner you want your banker to know you. You also want to have a feeling of continuity, where if you establish a relationship with XYZ Bank, you don’t want to recreate your whole story every time you go in. That’s a lot easier to do in a smaller community bank setting than it is at a larger bank.”

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3. Investigate fee structures

The old adage “nothing is free” is especially pertinent where banking is concerned. Your conversation with any bank representative should include a close look at fees for everything from using the ATM, writing a check, and getting a monthly account statement. But also take note of other bank services you may need down the road, including wire transfers and credit-card processing, which can add up quickly as your business grows.

Meloy notes it can sometimes be difficult for a business owner to determine up front just how much he or she might end up paying in fees because the businessperson doesn’t always know exactly what’s going to make the business the most efficient.

“Sometimes what they think going into a banking relationship changes over time because their own customers change or technology changes,” Meloy explains. “Fee structure is important but I contend it’s like anything else — sometimes you’re going to get what you pay for or don’t pay for. That might be just fine depending upon the sophistication of needs that a business has.”

Other times a business owner may just need to accept that banking fees are a cost of doing business, provided it makes the business more nimble.

However, Meloy says business owners should rarely see monumental differences between the fees one financial institution charges compared to the next.

4. Look into the bank’s reputation

As you explore the best small business banking options, bankers suggest turning to trusted peers who are already knee-deep in business banking.

Business owners in your professional network can share their experiences with various banks and help guide you in the right direction, notes Hegenbarth. Find out how satisfied they are with their bank’s services and its willingness to grant loans and provide valuable banking advice.

“I think word of mouth is more valuable than any other resource,” Hegenbarth says. “Start with your networking groups, like the chamber, and then talk to your attorney, accountant, and insurance agent to see who they do business with or have heard great things about.”

Adds Spitz: “We always say a referral from a trusted and respected friend is a great strategy. We get most of our business from referrals. Often it’s that third-party introduction that’s very efficient and removes a great deal of stress from all parties. Most businesses just want banks to be a valuable resource and then get out of the way. It really comes down to the personality fit and the banker’s ability to understand a company’s goals and offer creative financing solutions. It generally requires a banker with experience and loan-decision authority to do that well. A business’ friends, if you will, will know if a banker has that skill set.”

5. Establish an ongoing relationship

After selecting a bank for your small business, make the effort to build a relationship with a banker who “gets” you and your business. Ideally, this individual will identify ways to support your business that you hadn’t thought of and can become a useful resource in the event of a fiscal emergency. Your banker can also help you forecast the types of banking services you’ll need a year or more down the road.

Once you’ve established a relationship with a banker, meet with him or her at least once a year and offer an update on your company’s finances.

Bankers recommend viewing your banking arrangements as a long-term relationship. Consider not just what you need immediately, but services you may require in 18 to 24 months. You want to find a banker who understands your business and industry, including your creditworthiness and your seasonal borrowing needs. Ideally, your banker will see a customer’s growing business as an opportunity to provide more useful services and will listen if you run into a financial emergency.

The relationship a business owner has with his or her banker is a very important one, notes Tom Dott, vice president of commercial banking, First Business Bank.

“Whenever I have a great experience as a client, I like to think about what made it a great experience,” Dott says. “With each of these reflections my list of characteristics of a good business relationship expands and prompts me to evaluate my own execution.”

Dott contends there are a number of things a business owner should be able to expect from his or her relationship with a banker, such as honesty, transparency, communication, responsiveness, compassion, and value, among others.

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So you need a business loan

According to Lynn Sigfred, vice president of commercial banking for First Business Bank – Milwaukee, in the life of nearly every company there will come a time when financing will be needed to purchase equipment, a building, or maybe acquire a competitor.

“This reminds me a bit of being a child,” Sigfred notes. “You really want the cookie, but you don’t want to do whatever horrid job Mom or Dad has lined up for you to complete in order to get that treat. Likewise, you want the loan, but are less than enthralled at jumping through all of the hoops that some crazy banker will require in order to get the financing you need.”

To ease the process of acquiring a business loan, Sigfred recommends coming prepared to an initial meeting with a lender armed with the answers to five basic questions.

WHO — Provide the banker with some background information on your company. What does the company do? Who are your customers? Where are your products or services sold? “If the banker has not worked with you in the past, this information will prove valuable in the underwriting process,” notes Sigfred.

WHAT — What is your financing request? For what will the loan funds be utilized? What is the purchase price? How much of a down payment do you plan to make? What is your approach to financing? Do you prefer to pay debt off as quickly as possible or do you prefer to do so more slowly because you may have other financing needs in the next couple of years? Sigfred says the answers to these questions will help your banker put together a financing proposal that assists in meeting your objectives.

WHERE — Where does the company stand in terms of financial performance? According to Sigfred, the bank will typically look for the following information to be provided at a minimum:

• The last three years of financial statements/tax returns for the company;
• Interim financial statements with accounts receivable and accounts payable aging reports;
• Personal financial statement (when applicable); and
• Two to three years of personal tax returns (when applicable).

WHEN — When are you looking to buy the equipment or building? If a new building is being constructed, when will it be started and completed? If a new piece of equipment is being ordered, when will it be built, delivered, and installed? “This information is helpful because the bank may offer an interest-only period to ease the burden on cash flow during the period when you may be paying rent on your existing building, as well as making loan payments on the construction loan for the new building,” says Sigfred.

HOW — How will this purchase positively impact the company? Bankers, like accountants, really love numbers, Sigfred explains. “If you can provide either projections showing the financial impact that the purchase will have on the company or the difference it would have made historically, that will be helpful as your banker begins underwriting your request. The bank will be looking to see that there is a benefit from making the purchase: reduced rent, increased margins due to producing product in-house vs. outsourcing, etc.”

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