The Importance Of Your Bank Relationship
Jan 06, 2010
The Importance of Your Bank Relationship
Today, more than ever, a business owner must carefully choose the bank that best fits their business needs. A bank should be more than a safe place to deposit your checks, maintain your excess cash, and help you pay your bills. Your bank should simplify your cash management processes, give you access to capital, and be there for you when you need them.
We have all seen how the current recession has adversely impacted both large and small financial institutions. Bauer Financial (bauerfinancial.com) offers a bank rating service that uses a 5 star index, measuring a bank's strength and stability. The rating is based on the bank's capital ratio and other financial metrics (4 & 5 stars - recommended, 3 stars- adequate, 1 star- troubled). There is no charge for the basic star rating and an addition fee for a more comprehensive report. It is a good idea to review the rating of a new bank you are considering doing business with as well as periodically checking on your existing bank's rating.
If your bank is having financial difficulties, it is possible they will not be in a position to support your company when you need them the most. A struggling bank may be more concerned about their financial future than yours. They may be unwilling or unable to renew your credit line even if there has been no significant downturn in your business. Additionally, a struggling bank may be acquired by a lender that doesn't like or understand your business. It is possible that the people you have a relationship with will be replaced by new bankers that don't know you or understand your business. These new bankers may not demonstrate the same loyalty to their customers as your old bankers.
In evaluating a new bank, it is important to know the lending history of the institution. Do they understand and seek out companies of your size and in your industry? How quickly are decisions made at the bank? Does the bank have a slow moving bureaucracy? Do they have a reputation of terminating relationship unexpectedly due to internal issues?
It is obvious that a bank prefers a relationship with companies that have a positive, improving bottom line and a stable cash flow. Additionally, banks value a business that produces accurate financial statements and has a well thought-out business plan. Nothing shakes a banker's confidence more than financial statements that are issued late, significantly miss budget or are riddled with errors.
Banks do not like surprises. A company that is properly forecasting their profit and cash flow should be able to alert their bank in advance of disappointing results, a possible covenant breach or the need for additional capital. Your bank will appreciate being told of an issue affecting your business before it happens. Advance notice shows you are on top of the situation and the bank will be more likely to help you through a short term crisis
As business people we are all concerned about the bottom line. When it comes to the cost of a loan, many of us focus exclusively on interest rates and fees. It is important however to properly balance interest cost with the appropriate loan terms, conditions and an available open line of credit. If there is a hiccup in your business, a low priced loan with overly restrictive and tight covenants will surely end up costing you more in the long run. Overly restrictive limits on cash distributions, capital investments and cumbersome reporting requirements are all examples of non interest costs that should be taken into consideration. Flexibility, available credit, and reasonable loan covenants go a long way in giving you piece of mind and allowing you to sleep at night.