Finding a good bank to partner within this market can be tough. Youneed to find one that is the right fitand can support you with the necessarytools to be successful. Current economic conditions have forced banks to reexamine their credit practices.
“Business owners need to be more prudent in choosing their banks,” saysStephen Ball, first vice president andhead of business banking at MBFinancial Bank. “If you choose a bankthat is undergoing financial difficulty,the rules may change on you in the shortterm. As recently as 12 to 18 months ago,bank liquidity and balance sheet positionallowed more aggressive lending. It’s adifferent story today with many banks.”
Smart Business spoke with Ball aboutthe qualities you should look for in abank because using the right bank cansave you time and money.
What qualities should you look for in abank?
- Liquidity, ability to lend and absorb shifts in the balance sheet
- Balance sheet strength
- Loan loss reserve
- Willingness and ability to extend credit
- Consistency of loan policy
- Commitment of the bank to your business/market
How can you find these qualities in a bank?
Liquidity is simply how much money abank has to lend. Their capacity to lenddepends in large part on their capitalbase and the mix of their funding.Furthermore, if a bank has a number oftroubled assets (including loans), itaffects its capital base, and thus impairsits ability to lend. A bank that is wellfunded will have a mix of deposits fromvarious sources of both core and wholesale deposits. Additionally, core depositswill account for more than 50 percent ofthe total liabilities.
Companies should verify that theirbank has comparatively strong performing loans and deposit ratios, as well.
Every bank has troubled loans. Butbecause of today’s economic conditions,there are more of these than at othertimes in the business cycle. To addressthese loans, banks create a loan lossreserve. A proper loan loss reserve provides an accurate picture of the bank’sstrength and durability. A higher loanloss reserve doesn’t necessarily meanthat a bank has more bad debts; it couldmean it’s being conservative. Tier 2 capital calculations include loan lossreserves in capital; the more capital, thegreater flexibility a bank has duringtimes of stress. It gives them a highercapacity to lend and support customers.
In addition, you want a bank that stayscommitted to its market and your business. If you are with a bank that onlydoes business banking during goodtimes, it will not have the appetite orability to support you during a downperiod.
You almost have to apply to a bank tolearn about its willingness and ability toextend credit. You can ask your loan officer about advance rates and monitoring,which will give you an idea of how thebank is lending, but you won’t know about its willingness until you ask.However, just because a bank approvesyour loan request doesn’t mean thatamount of debt is correct for your business. Ask yourself, do I have the capacity to handle that debt? Did my bankerperform an appropriate amount of duediligence to understand my business? Ifyou overleverage yourself, you may notbe able to move your relationship shouldyou want to, or worse, your businesscould suffer. Now, more than ever, youneed a bank that understands your business and can provide appropriate commentary on what leverage might be rightfor your business. A bank that is willingto lend but is just an order taker may notbe providing you with the best service.
What questions should you ask your bankabout the consistency of its loan policy?
- Has your loan policy changed recently and how?
- What are your collateral advance rates?
- What is your approval process?
Some banks have loan committees,while others can have officers sign offbased on dollar amounts. If your loanofficer is the only one seeing andapproving the deal, you run the riskthat no one else in the bank will agreeshould he or she leave.
- Check with other bank customers for references, just like any key business partnership.
Most banks have tightened their creditpolicy in recent months. This is not necessarily to reduce lending but to take acloser look at the businesses they lendto. Lending a business too much moneycan be more detrimental than not lending it enough.
STEPHEN BALL is first vice president of business banking at MB Financial Bank. Reach him at email@example.com or(847) 653-1197.