How to Choose a Commercial Bank – Start With the Banker
The following excerpt is from an article authored by Stephen Friedman, Executive Vice President and Regional Manager at our division, Regents Bank in San Diego. He represented the client service philosophy of Grandpoint Bank and its divisions so well, we wanted to share this with you. The full article originally appeared on the Renaissance Executive Forums website.
By Stephen Friedman, Executive Vice President & Regional Manager at Regents Bank
Product Based Criteria – Branches, Rates, Terms, Fees
As a commercial banker out in the marketplace peddling my wares, this is a topic that I discuss with business owners on a daily basis. If I am to convince a company to move its business over to my bank, the first thing I need to figure out is what they are looking for. What are the criteria that they will use to make a decision? No business owner wakes up in the morning thinking, “You know what, I am going to change my banking relationship today. I have been with my existing bank long enough and it’s time for a change.” No, a business owner would generally prefer a root canal over changing banks. Their call to me is usually triggered by one of three things, 1) A credit need that is not being addressed to the company’s satisfaction by the incumbent bank, 2) A negative service event that crossed the company’s pain threshold, or 3) Price shopping.
Over time I have found that the primary reason the company has reached this point with their existing bank is because they used the wrong criteria in selecting their bank in the first place. For businesses that are not heavy users of credit, the initial banking decision was usually based on which of the major banks had the closest branch location, were offering the best deal or already provided personal banking to the company’s owners. For heavy users of credit, the decision generally came down to the most lenient loan terms and/or the lowest pricing. These are product-based decisions in an industry where the products have become commodities. So if bank selection is based on product differentiation and pricing, you might as well put on the blindfold, get spun around three times and see if you can pin that tail on the donkey.
Bank Financial Strength is a Given
Then what are the right criteria to use in making your banking decision? Let’s take it as a given that you only want to work with banks that are financially strong. While this can take a little digging to uncover, the information is readily available on the FDIC’s website, as well as through different bank rating services like bankrate.com and BauerFinancial. A financially troubled bank, particularly one operating under a regulatory enforcement action, will likely be restricted by the regulators from providing you the commodity-like products and services at competitive prices I mentioned earlier. More importantly, the bank will be inwardly focused. Satisfying regulatory concerns will trump satisfying you, the client.
Knowledge-Based Criteria – Your Banking Team is the Differentiator
Once you’ve cleared the financial hurdle and are only focused on financially strong banks, I believe that the most important consideration in choosing a bank is the team of bankers with whom you’ll be working. Not to say that the bank itself is unimportant, it’s just less important than the bankers you are working with directly. Since the products themselves are commodities, your banking team is the key differentiating factor. And guess what? Your banker is practically free. There is no extra fee or charge levied on your bank statement for banker time and talent devoted to you. It comes with the account. Banks that compete on price, if they want to be profitable, have to have a low cost structure. Since the principal cost for a bank is people, that means they must pay their people less, which results in a lower level of competency. This is particularly true when it comes to small to mid-size business banking, which I equate to businesses with less than $40 million in sales. If your bank is doing both, offering the most competitive prices and has the most talented bankers, then be careful. Their economic model is flawed and will likely catch up to you as the client in some way as time goes on.
Keeping the Credit Spigot Open is the Key to Growth
So why is having an experienced, technically competent banking team important, and what kind of value should you expect them to bring to your business? Helping to address and resolve issues surrounding finance is where a skilled banker can have the most direct, positive impact on your company. This is particularly relevant for credit-intensive businesses. Small to mid-size businesses often don’t have room in their cost structure for a full time Chief Financial Officer. The CEO/Owner knows the numbers, but generally from a different perspective than the CFO. CEOs intuitively understand return on investment, without the need for detailed spreadsheets and graphs, but generally are much less focused on the balance sheet and other key financial measurements and analysis. A good banker can help you in all of these areas.
The importance of this financial expertise to your business cannot be overstated. I believe that one of the most important factors in a company’s long term success is continuous access to capital, both debt and equity capital. What determines this is a company’s level of profitability and growth in relation to its level of debt. Bank debt is the cheapest form of capital, therefore the more you can borrow as part of your overall capital requirements, the higher the return on your equity investment in the short term. The flip side is that the more you borrow, the greater the financial risk in your business. Banks want to get paid back faster than other forms of capital, which increases the fixed cash outflows of your company and therefore raises the sales level required to break even. The bank also has a priority security position in the assets of the company, so if you can’t meet your break even sales level, you are at risk of losing everything. Working with a banking team that understands this and advises you accordingly is worth its weight in gold. On the surface, the banker who can get you the most credit with the most lenient terms at the lowest price would seem to be the obvious choice. But it is often the beginning of a company’s demise. Without the financial expertise as to how to appropriately use such a credit facility, it’s like being handed a loaded gun without any firearms training.
Credibility – You Work So Hard to Build It, but It Can Crumble in a Second
In addition, the bankers with which you work are your advocates and spokespeople within the bank, especially when it comes to credit-related issues. The ultimate decision maker within the bank needs to have all of the relevant information in an understandable format in order to reach the appropriate conclusion. You need to be confident that your banking team can accomplish this on your behalf.
A company rarely evolves in a linear fashion. There are peaks and, inevitably, valleys. A good banker is going to maintain an ongoing dialogue with you and be proactive in addressing small problems before they become big ones. Your banking team members will share information with each other to ensure that all key players are informed so that surprises are kept to a minimum. That way your credibility is maintained, as well as your bankers’. Our role is to provide you with the information that you need as a business owner to make tactical adjustments so that you don’t jeopardize access to bank credit, your cheapest source of capital.
Conclusion – A New Vision of your Bank
I encourage you to think of your bank differently. A bank’s products are commodities, but its people can prove to be an invaluable resource in your company’s success. Your banking team should offer a separate and distinct set of skills that you can rely upon to help you to make the right strategic decisions in leading your company forward.
And while changing banks can be perceived as being as desirable as a root canal, it’s really not that bad. I would think of it more in terms of your bi-annual dental checkup and cleaning: It’s a little bit of a nuisance, but it sure feels good when you’re done.
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