Switching Banks: Should You Stay or Should You Go?

Denver financial consultant Kira Riedel and a client labored for days on a buyout offer for a failing Colorado construction company they wanted a local bank to fund. Despite their efforts, including getting input from the bank’s own outside consultant, negotiations appeared to end before they’d begun.

Not two minutes into Riedel’s funding pitch to the bank’s special assets group, an executive stopped her with a curt: “This meeting is over.” He didn’t like the terms and didn’t want to waste time hearing more, she recalls.

Something else Riedel recalls: Her often hot-tempered client had to restrain himself from reaching over the table to deck the guy.

While most bank-client relationships don’t come to blows, the dynamic between financial institutions and their midmarket customers is decidedly different since the start of the recession. Banks that once fell all over themselves to build out lending lines have drawn the reins in tight.

Banks might see it differently. If they’re not “too big to fail,” they’re under threat of adding to a tally of bank closings that already numbers 147. Banks of any size face the threat of further real estate defaults, as well as the daunting crush of non-performing loans already on their balance sheets. According to data compiled by Bloomberg, toxic loans at 150 publicly traded U.S. banks accounted for a full 5 percent of their total assets in the fall, pushing them near the point of no return. No wonder they’re not much fun to deal with.

But forget the backdrop, since everyone’s facing tough times. Banks’ client relationships have suffered in part because of human factors. Banks have laid off about 400,000 people, including folks with whom businesses had developed long-standing personal relationships. Account managers who still have jobs are under pressure to deliver stronger accounts to their employer’s bottom line. Midmarket customers talk of having calls ignored, tighter credit terms and nary a friendly ear to help through tough times with a loan to cover cash flow and payroll.

On Pins and Needles
Even in good relationships, everyone’s tense. Yale Carolinas, a Charlotte, North Carolina, midmarket equipment reseller, had been thick as thieves with Royal Bank of Canada, its lending partner since 1990. But when receivables slowed because customers weren’t paying on time, the bank looked to tighten Yale’s credit terms.

“I needed them loosened up,” Yale President Gray Wheeler says. “If receivables aren’t collecting as fast, it’s not because of our processes, but because (customers) aren’t paying as fast.”

Wheeler was able to fall back on the company’s 20-year relationship with the bank, finding the right people to talk to, including a regional vice president he eventually won over. “I made sure he knew who I was and that I was responsible. If anything goes wrong, I go straight to him.”

It worked: Some of the bank’s terms tightened up, but overall changes weren’t drastic, Wheeler says. To return the favor, Wheeler offered RBC additional business, including the company’s 401(k) and treasury management.

For many banks, even a long relationship with a client hasn’t been enough in this economy. Manship Media, a Baton Rouge, Louisiana, TV station and newspaper owner, has used the same bank for 70 years, starting long before the once-local institution was acquired by a major national bank. Like the rest of the news industry, Manship Media suffered recently due to declining ad revenue, so much so that the company’s working to shore up losses by selling property and reorganizing. Meanwhile, Manship CEO Ralph Bender wants his longtime banker to cut him some slack. “Down the road we’re going to pay down our debt,” he says, but today he wants to know: can he skip the tough terms to help with cash flow?

Trouble is, the national bank that acquired the local one is now dealing with its own recession-induced problems. “I love my relationship manager to death, but it’s become increasingly difficult to satisfy the bank’s demands,” Bender says. Even so, he won’t consider switching. “There’s no question I could find someone else to refinance us, but there’d be no relationship there.”

Executives such as Bender and Wheeler recognize they could shop around for better rates from other banks, and if they did, they’d be in lock-step with a consumer movement launched by media personality and Huffington Post founder Arianna Huffington. The campaign, called Move Your Money, urges consumers to protest bailouts by closing accounts at banks that received TARP funds and opening new ones at community banks and credit unions.

“Since April, JP Morgan/Chase, Citibank, Bank of America, and Wells Fargo – all of which took billions in taxpayer money – have cut lending to businesses by $100 billion,” Huffington wrote.

Linda Keith, an Olympia, Washington, CPA and former CFO who advises banks on business credit issues, thinks companies with strong prospects and balance sheets are in a great spot to join Huffington’s movement. “I’d think [the banks] would be shopping to you,” she says.

To Jump or Not to Jump

Keith suggests midmarket companies ask the following questions to decide whether to jump ship:

• Has your bank restricted credit without reason?
• Are they unresponsive?
• Are they under an FDIC directive, and if so, what kind?
• Has the lender who knew your company best gone elsewhere?
• Are you personally offended by your bank’s behavior?

If your bank is behaving badly and could potentially hurt your business, you need to make some new connections. Al Manbeian, managing partner at GPS, a Utah firm that helps companies manage foreign currency risks, says shopping for a bank comes down to four key steps:

• Project what your financial needs will be in six to 12 months.
• Evaluate where your bank falls short and in which specific areas you want help. Look at a new bank’s level of expertise: how long has it been a market leader in your area of need?
• Get to know the decision-making hierarchy at prospective financial partners. “Will it be the account exec assigned to you, a group of statisticians or computer modeling?” Manbeian advises asking.
• Finally, “Make a subjective decision on your bank’s commitment to you,” he says.

What kind of banks should you consider? Although midmarket companies tend to think they fit better with big banks that offer a full menu of services, Keith, the business credit consultant, suggests considering community banks and credit unions for certain needs. “They might need business loans to offset their real-estate lending,” she says.

Whatever the changes at your bank or in your business, experts agree communication is key. For Riedel, the Colorado finance consultant, communication – and staying cool in a heated situation – rescued her client’s construction company buyout proposal from going south.

After initially cutting the meeting short, bank executives apologized, her client calmed down and the group spent the rest of the day negotiating, ultimately agreeing on terms even more favorable than those in her initial offer. Says Riedel: “This is a new market. No one, including the bankers, has experience with this.”