The idea of switching financial institutions (FI) can frighten any accounting department. But as a major supplier, your corporate financing relationship should be reviewed periodically.
A long time ago, as an accounting intern, I was asked whether our company should change its FI. We ran a bank tender, and while we stayed with the incumbent, we saved more than $300,000 per year by forcing the banks to compete.
The decision to switch should be based on a long-term assessment. Look beyond your current requirements, to what your financial service needs will be in three to five years.
As a subordinated debt provider, I see first hand most of the traditional lenders in action. Our banks and credit unions are rightly conservative with strong risk mitigation policies. However, there are differences in lending practices between them and, surprisingly, differences between branches or personnel within the same FI. It therefore pays to know where each FI is focusing effort and which individual bankers are best to deal with.
There are three strategic reasons for changing FIs:
•Access more money: For growing companies, accessing finance for working capital is a must. Those doing an MBO or acquisition will often choose a lender based on the amount they can borrow. Not all banks have the same lending limits. Some banks lend from 1.0 to 1.5 times EBITDA on transactions where there is little in the way of security. For example, BMO will often finance intangible assets in addition to the security value of tangible assets. A new entrant, PNC Bank from the United States, is applying stateside lending criteria, which are generally more liberal. There are alternatives and supplements to senior debt in financing transactions, such as asset-based lending, subordinated debt and vendor financing, that can provide more capital. Assess the weighted average cost of the total financing package when considering your alternatives.
•Obtain better service: Choose an FI that is best suited to your business. If you’re involved in international trade, HSBC has an extensive international network that can assist you in establishing credit and managing cash. Some banks have established industry specialists. For example, RBC Royal Bank has a knowledge-based industries and media group. Further, credit unions are particularly competitive in real estate financing – for both development and existing properties. In addition to the institution, the people matter; some account managers are able to source better deals or more money for their clients. Much rests on the account manager’s internal credibility with their credit department, so choose someone with experience, integrity and expertise.
•Find better terms and conditions: For mortgages and equipment-lending, saving a percentage point can add up to thousands in savings. Other negotiating points include the extent of personal guarantees and other security pledged, prepayment penalties and fees.
Changing FIs is no simple task, even if most offer switching services. Perhaps more costly is the loss of an important relationship that can assist in times of need. It takes time and energy to build a banking relationship extending beyond your account manager. FIs tend to value existing relationships more than new ones and are loathe to lose good clients. We saw this in the recession, where some FIs turned off credit for new prospects but continued to service existing clients.
Whether you’re ambivalent about your FI or severely perturbed, it’s a good idea to review your banking arrangements at least every three years, or sooner if you’re facing a major business event. Whether you change, or – as we did stay – you may find a better deal for your business. •
