familyownedbusinessblog

5 Tips for Selecting Your Bank

Recently I attended the one of the Breakfast Series sponsored by the Austin Family Business Program.  The topic for that particular event was Family Business Banking for Long-Term Success.  The presenters gave 5 tips on issues to consider when choosing a bank for you and your business.

1.    Do you know your bank?  Your bank knows your business, but do you know your bank's business?  How is the bank rated?  What is its capital structure?  What is the bank's balance sheet?  Do you know its rating on Bankrate.com?

2.    Bank with the smartest person in the room.  You want to know that your bankers are qualified and understand business, especially your business.

3.    Do you know the decision makers?  You should know who is the decision maker for your business.  Have you met the underwriter?  Do they understand your business?  Does your relationship manager understand your business so that they can be an advocate for your business?

4.    Ask your banker for a reference.  You should talk to other customers and find out what their experiences have been with the bank - during good times and bad times.  What support has the bank given them? 

5.    Don't make the decision based on price.  Your bank should be a partner for you in your business.  Who is going to be the best partner for you for the long-term success of your business.

Family Business Banking for Long-Term Success

John Ward (2010) noted that “the lack of investment in human capital and in financial capital is the stumbling block to business growth.” Good relationships with bankers can support the complex financing needs of family businesses and determine the best strategies to execute the family’s vision for the business. The Family Business Consulting Group’s “Seven Financial Habits of Highly Effective Family Companies” include several practices that can be addressed with sound advice from the banker, a key professional on any family business advising team.

On Wednesday, April 13, 2011, Austin Family Business Program sponsored its Breakfast for Business series on the topic of how to build a long-term relationship with the business's banker. Representing the banking industry on the panel was Justus Poling from Umpqua Bank; and, Leif Hansen, Owner and President, Leif's Auto Collision Centers represented the family-business owner.  I, Kay Abramowitz, had the distinct pleasure of facilitating the discussion between the panelists and the audience. 

Key to a good relationship is candid and frequent conversations about the business. Good or bad, don't hide anything from your banker. It does not help you in the end was the advice from Mr. Hansen.  For it's part, the bank wants to see steps being taken to minimize any risk to the bank for banking the business.  Such steps include having a seriously thought-out succession plan for ownership and management.

Mr. Poling gave some good tips on "when and why banks make sense". As to when, Mr. Poling listed the following:  business is at least 3 years old; business has 2 years of profits in the last 3 years; and, the business has adequate equity and collateral.

As to why, he gave the following list for the audience to consider: a banker is an advocate for your business; borrowing at a lower cost; it's convenient; FDIC regulates banks; banks exercise limited controls over the business; and, resolution of debt does not require a liquidity event.

Mr. Hansen shared with the audience that he left a large bank for a smaller one because of the attention he received at the smaller bank.  He said he couldn't get any one to pay attention to him or his company when he was at a larger bank even though he tried. 

Because of this breakfast and the sharing of their insights by Messrs Poling and Hansen, we all gained insight in how important a good banker can be on the team.

    

    

What Is The Best Approach For Raising Capital?

When a family-owned firm needs capital to help grow the business, there are many creative options available, in addition to getting a loan from your friendly local bank. The SBA’s publication “Challenges in Managing a Family Business” includes a partial list:

“! Taking or refinancing a mortgage using the company's assets as collateral.
! Asking suppliers to extend credit on purchases.
! Factoring (selling) the company's receivables.
! Inventory financing.
! Borrowing from friends on a personal note basis.
! Borrowing the cash surrender value of life insurance policies owned by relatives.
! Obtaining a long-term loan from an insurance company.
! Working with a lender and the U.S. Small Business Administration (SBA) to get a business loan.
! Financing with a Small Business Investment Company licensed by SBA.
! Selling a portion of the stock for cash to the company's employees.
! Selling some of the stock for cash to another company. In a merger, you can use the credit of the larger company.
! Contacting a regional investment banker who may privately find a lender, using some of the company's stock as collateral.
! Contacting a national investment banker who will underwrite some of the company's stock. This is called going public.”

It is of course important to keep in mind that not all of these options are good choices for every family business. Setting aside purely operational issues, a family owned business needs to consider how these financing options might improve (or upset) the firm’s current ownership, management and family relationships. Some of the many questions to consider:

• If employees own a portion of the company, do they share the family’s long-term goals and plans for the business? Or is the business “just a job” for the employees?
• If a non-family member owns a substantial portion of the company, would this enhance the family’s relationship with the business? Or would later generations feel that the legacy has been sold off to an outsider?
• If the company has a bank loan, do the bank’s financial reporting requirements provide an framework of good business practices? Or does the financial partner interfere with the operating flexibility that can be a unique strength of a family owned business?
• Do all of the family members reach the same answers to these questions? Or are there differences of opinion that need to be understood?

There are no “right” answers to these questions. Because each family is different, each family-owned business is different. The best approach to raising capital is the approach that respects these special considerations, instead of focusing merely on comparing financial terms.