May 26, 2011

Keys to Building a Successful Banking Relationship (Guest Column)

Arnold & Porter Advisory

By Stephen Heitel
415 229 8428

We asked Steve Heitel, the President and CEO of Presidio Bank, to give us his take on building a successful banking relationship. Presidio Bank, a locally owned and operated bank headquartered in San Francisco, provides traditional commercial banking services to small to medium sized businesses, along with the owners and executives of those firms.

Selection of a Bank (and more importantly a banker)

  • Get a Referral - Ask for referrals from your other professional service providers (CPA, lawyer, insurance broker). Most keep contact with a number of banks and have an idea of what each bank specializes in. Also, coming in as a warm referral tends to add credibility to your story.
  • Choose From a Few Banks - Interview three or four potential banks. If you expand the universe beyond that you will end up investing a lot more time with limited added value. Also, if a bank knows it is competing with ten others, it will not invest much time in the proposition as it has a limited chance of success and the winner will generally be the bank that is willing to accept the lowest return—not an attractive prospect if you are the banker.
  • Meet at Business - Insist that the banker visit your place of business. If they are not willing to, scratch them off the list as it is a great early warning sign as to how much time they are going to devote to understanding your business.
  • Provide Overview of Business - Give the banker a realistic overview of your business much the way you would a potential investor. Deliver this with candor. If you are having challenges, describe them and what you are doing about them. (They are going to figure it out once you show them your financial statements anyway.)
  • The Interview - Interview the banker as he/she interviews you. Get a sense of where the bank's sweet spot is (and whether you fit it) and the types of clients the banker handles. If you are a $5 million sales company and your banker is handling a portfolio of publicly-traded companies, it is probably not a good match. The reverse doesn't work either. Test the banker's knowledge of your industry. Unless you have a highly specialized niche, it is realistic to expect the banker to have a basic understanding of your industry, the competitive landscape, and the keys to success. While it is appropriate to educate a banker on the specifics of your business, he/she should either know or have researched your industry prior to the initial meeting. This is important because the banker has to represent you within his/her organization up the chain of command (loan committees, etc.). Bankers who understand their client's businesses will do a far better job of this and will perform much better for you.
  • Size of Bank - The size of the bank matters, but not as much as the people you are dealing with. The bank must be big enough to handle your lending needs for now and into the foreseeable future, but not so big that you are not important enough to be served well. Ask about the bank's lending capacity and appetite but also ask about where decisions get made. If possible, you want to make sure you have access to the decision maker when you need it. This is particularly important during difficult times when you want to be able to convey your message first hand to the person in charge. If the credit decisions are made in a loan center in Boise or Salt Lake City, their ability to understand the unique nature of your business challenges is not going to be as good.
  • Financial Information and Guaranties - Once the banker has passed the test of your first interview, give them a full financial package on your business. Requirements vary from bank to bank, but expect them to ask for three years of financial statements on the business, business tax returns, and profit and loss and balance sheet projections for at least the coming year. Depending on the type of credit you are requesting, copies of accounts receivables and accounts payables agings are common fodder for banks. The owners of most small businesses will be asked to personally guarantee the business loan. It is not an absolute, particularly if your business is extremely well capitalized and has a long, successful track record. If a personal guaranty is required, expect to be asked for a personal balance sheet and at least a couple of years of federal tax returns. While the bank's need for information seems to be insatiable, take solace in the fact that the better the bank understands you business, the more risk it will be willing to take. Lacking information, banks default to their most conservative posture.
  • Package Your Business to Get the Best Deal - Recognize that while willingness to extend credit may be your most important consideration, the bank values your deposit accounts and other services you use as much as your loan business, if not more. Expect that they will be packaged together and use the value of your deposits in the negotiation process. (The more deposits you offer, the more favorable your loan pricing.)

Managing the Ongoing Relationship with your Bank

  • Build a Relationship - Strive to be your bank's best client. Banks do their best work for clients that value the relationship. When times get tough, banks have the most flexibility with clients that have been the most cooperative and trustworthy over the course of the relationship.
  • The Value of Loyalty - It is okay to shop the relationship every two or three years to keep your bank honest. But if you shop every year and negotiate the last quarter point out of every deal, your bank will get deal fatigue and, when you need it most, you'll just be a transaction to it. If your bank has done a good job for you, it should warrant a premium over what the cheapest competitor in the market is willing to offer to bring in your business.
  • Open Communication - Keep your bank up-to-date on developments in your business. Communicate the good news but communicate the bad news even faster. We have a saying at our bank that we don't shoot the messenger bearing bad news... unless he is late. It may seem counterintuitive, but a bank is going to be more flexible in a bad situation if it has confidence that it is getting timely and accurate information. Bad news is not the banker's biggest enemy, surprises are. If you go to your bank preemptively with a problem and how you propose to deal with it, you will get a better response than if the bank is left to discover it on its own. Hell hath no fury like a banker surprised.
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