Is banking with one bank placing all your eggs in one basket? Particularly with industries falling in and out of favor with banks, is it wise to bank with only one institution? The answer to this question was candidly provided by bankers at a recent Meridian event.
Commercial loan vice presidents of large national and regional banks gave uniform answers — If you want the very best rate and terms, bank with only one bank. To protect yourself from irrational bank decisions about your industry, however, stay friendly with one or two outside bankers who will stand ready to provide the services and credit facilities your company needs at a moment’s notice.
Loan rates are set in most banks by determining a total yield on a customer’s relationship.This means that checking account fees, trust account fees, cash management fees, actual deposits, letter of credit fees, etc. are all taken into consideration when loan rates are set. Therefore, the more business a company does with a bank, the more credit given for that business and theoretically, the lower the loan rates.
If a bank does not sense competition for an account, however, they may have a tendency to take a little extra on loan rates. To avoid being taken advantage of by a banker and have an ace in the hole, be friendly with one or two outside bankers. Not only will the threat of competition keep your rate low at your primary bank, but you will also protect yourself and your company in the event your bank decides to get out of your industry.
Banks can be very fickle when it comes to industry decisions. All it takes is one major bad debt for a bank to decide an entire industry is too risky. For instance, one banker related a story about how hog feeding became “out of policy” for his bank after a significant bad debt. Ten years later, the bank looked again at hog farmers and could not find a sound reason why they had deleted the whole industry from their lending.
To keep the doors open at other banks that don’t currently have your business, our bankers suggest you conduct individual quarterly or semiannual lunch meetings with each outside banker where you bring your financial statements and discuss your company’s progress. If you get in a jam with your current bank, one of the new banks will be able to respond quickly since they’ve been getting your financial statements and updates all along.
What should you do when you expand to sites in locations that are not served by your own bank? According to our panel, banks prefer you to select a small community bank that won’t be competition to their big bank to handle that deposit relationship.
What about getting loans for local real estate projects from different local community banks? According to our bankers, any outside bank adds risk to the primary banking relationship and therefore will negatively impact your bank’s loan pricing.
One banker gave an example of a large company with a small real estate loan at a separate bank. The loan was made with certain financial covenants. Unfortunately, the company ended up not meeting these covenants, which put the loan in default.
At the time of default, the entire amount of the real estate loan became current debt (instead of mostly long-term debt.) This reclassification of the loan in turn negatively impacted the company’s current ratio, causing a covenant default in the working-capital-line covenants with the main bank.
From this example, you can see that the more banks involved in lending to a particular company, the more risky that company becomes to bankers which must be reflected in higher loan rates.
Therefore, you may not be doing yourself any favors by dividing your banking between institutions. Instead of getting their best rates and service, you may be paying a premium because of the perceived risk.
To achieve the absolute best rates and terms, bid out all of your banking needs every three years, awarding your entire package to only one institution (after lots of negotiation, of course!)
A first rate bid package should contain:
• A summary of the credit facilities including amount, purpose, terms, collateral and at least three different possible sources of repayment.
• A summary of deposit, cash management and other non-credit requirements.
• A brief company and management background.
• Three years of financial statements with explanation. (Plus personal financial statements of any guarantors.)
• Projected Income Statements and Balance Sheets with explanation of major assumptions.
• Project details if credit request includes project financing.
• Aging and listing of accounts receivable if receivables financing part of request. Inventory listing if inventory will be used as collateral.
In summary, using a bid process and then awarding all your business to one bank will ensure your company receives the best rates and terms available in the market given your company’s financial condition.
