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Evaluating Your Banking Relationship

Author: Larry Chester, President

By this time, you are well on the road to executing your strategic plan for this year. You spent time at the end of 2019 putting together your goals and aspirations for yourself and your business. You evaluate your client relationships – do they fit into your business model? Are they time consuming? Are they as profitable as they can be? Business owners should also evaluate their banking relationship, as this can have a profound impact on their ability to execute that strategic plan. Banks play an important role by providing working capital, equipment financing and real estate acquisition financing, which helps to continue to drive economic growth.

You should be continuously evaluating your clients to see if they are still well suited to your business. You should do the same thing with your suppliers, and that includes your bank. The banking industry continues to evolve. The consolidation (which is expected to continue) that has occurred in the industry of late has impacted many businesses. But it isn’t just consolidation that can impact on your banking relationship.

Here are some reasons your banking relationship might change:

  • Acquisition – your bank has been purchased or has purchased other mid-sized banks in your market.
  • Marketing – your bank has decided to make a bigger splash in your market and has loosened their requirements. Or worse, they had a difficult year last year, and they’re tightening up their controls.
  • Business Climate – the federal reserve bank has made some moves to raise interest rates or increase collateral requirements.
  • Your Business Results – You’ve had a few bad years, and the bank isn’t as happy with you as they used to be. Is it time to move?

Here are some things that the bank can do to make your relationship better, or more difficult. Some of these may push you to find a new bank. Some of them may be the result of changes in your company that make it difficult to find a new banking relationship.

  • Your relationship with your RM (Relationship Manager). If he’s available when you call, that’s a good thing, but if he’s calling you twice a week to see how things are going, it means that he is giving you more scrutiny, which is not the best thing.
  • Change in Covenants – Not every bank loan has covenants, financial tests that give the bank a quick view of how your company is doing. Your bank is suddenly adding covenants to your reporting, like EBITDA thresholds, Debt Service Ratio, Tangible Net Worth, Dividend Payout Ratio, Debt/Equity, Fixed Charge Coverage, or if they are tightening those requirements.
  • You suddenly have to start filling out a Borrowing Base certificate on a regular basis. Or, the bank has decided to have you fill out your BBC weekly, rather than monthly.
  • The advance rates that your bank has given you on your BBC have changed – they’ve gotten smaller. Instead of allowing you to borrow on 80% of your AR, they are now only giving you 60%.
  • The bank has requested a Personal Guarantee, or has increased the guarantee that is already part of your loan.

But there are other reasons to consider looking around:

  • Your business needs have changed, you need access to a bigger line, and your current bank isn’t comfortable loaning you more money, or the loan processing timeframe just seems to be getting longer and longer.
  • A move into International Business looks interesting, and your bank doesn’t have a direct international relationship.
  • An SBA loan looks promising to fund your expansion, but your current bank doesn’t do many SBA loans.
  • You haven’t looked at the banking market for 5 years, and you’re concerned that you’re not getting the best deal with your bank anymore.
  • It looks like you aren’t taking advantage of security or processing that some banks are providing that are more and more part of modern treasury management.

A banking relationship is complex, but it is a critical part of the way you run your business. The bank that you used to start your business may not be the bank you need today. You may need greater access to funds, or you may need a bank that can be more flexible – because your business is changing so rapidly. Take the time to talk to some other banks. You might be pleasantly surprised about what they can provide you, and the way your account will be managed. And that’s a good thing.


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