Guest post: When and Why to change your bank
Today we have Gary Hewamadduma, the CEO of CFO Plans who shares with us his insight on how to evaluate your banking relationships and what to look for when picking a new one.
He highlights the key areas on which to focus:
1. Optimizing for the best service
2. Having maximum control on your funds
3. Making sure that you have critical support when needed most
Please reach out to Gary on LinkedIn with your questions and comments!
The beginning of the second quarter of 2020 was full of uncertainties for businesses across the country. A viral pandemic that no one has heard before became part of our normal life, political and racial unrest on the streets (literally), and both supply and demand chain breakage across industries put heavy pressure on businesses.
All business owners, no matter what scale, started to formulate new strategies to manage cash flow, control overheads, and sustain revenue. The government assistance came in the form of a PPP loan administered by the SBA. No one was ready for the onslaught and neither was the SBA.
They started accepting loan applications in the first week after the CARES act passed, and within days realized the administrative nightmare involved in it. Some who applied got a grant up to $10K with minimal instructions as to what comes next, and others were left in the utmost confusion. Then, SBA decided to pass on the loan application and administration process to banks and SBA registered lenders and stopped accepting direct applications.
The next thing we knew, banks announced their own application process with their own “qualifying criteria”.
Most big banks gave priority based on the “value” of the clients.
Some banks gave priority to businesses that already had business loans or revolving credit facilities.
Businesses that had millions in deposit accounts were passed on for businesses who had meager $10K limit credit cards as bankers were following the “criteria”.
Most banks required that the businesses have had an account “as of a certain date” in order to be considered for a PPP loan. Providers of essential business services like CFO Plans had to help coordinate and untangle mysteries and secure PPP loans for clients who would otherwise have been rejected. While I have 100s of individual stories around this, the PPP loan situation was a great example of why you should be ready with the right bank for situations like that.
Let’s address some considerations of “why” and “when” to evaluate the banking relationship.
Why it is important: As I mentioned above, some banks absolutely aced it in handling PPP loans while others stumbled miserably. In this case, smaller banks handled it well due to their structural efficiencies. Their decision-making process, evaluation process, adaptation to SBA guidelines, etc. was much better compared to big banks.
Clients were not dealing with a 1-800 number, they had the personal assistance of a living breathing bank executive who knew them by name (and face). While we may never experience a one-in-a-hundred-year situation like this in the near future, it is important to have a relationship with a bank that can move at the speed you need and have your priorities as theirs.
When to evaluate: As the old saying goes, you cannot change the jockey while the race is on.
You should prepare in advance and build up the banking relations in advance. Most businesses scrambled to find a bank that can process their PPP application while their existing big bank put them to the end of the line. When turned-down businesses found smaller banks who were handling it rather efficiently, the smaller banks had to give priority to the existing clients, and rightfully so.
Why it is important: It is vital that the branch network, ATMs, and other physical logistics are in line with your requirements. If you are a restaurant chain, for example, it is important that you can make daily deposits of cash in multiple locations with minimal physical risk.
When to evaluate: This is an easy decision and something that you should evaluate at the very beginning. It depends on the type of business and if you foresee frequent need to be in touch with a branch or ATM at various locations, you should pick a bank that provides it.
Why it is important: We live in a digital age, and it is getting more digitized every passing day. Access to online banking conveniently, the ability to integrate bank account to the accounting system, ability to transact without leaving your office (wires, ACH, batch-based bill-pay, etc.), are all standard practice now, but it is surprising how many banks are still following old school processes.
Just last week, we had a client who asked our assigned accounting team to prepare a wire request letter to be signed and “fax” it to their new bank! (Because that was the bank process). Yes, it happened in the USA and yes, it is the 21st century.
When to evaluate: Tech capabilities need to be evaluated before you open the account. It will be a waste of everyone’s time to realize the tech shortcomings after the fact.
Why it is important: It is vital that the banking partner is capable of facilitating proper loan, investment, and treasury products. Most banks are continuously reinventing themselves in these areas and creating new banking products to suit the ever changing business environment. It is crucial to match your needs to a bank that understands and is capable of meeting those needs.
When to evaluate: This evaluation can come at any stage of the business and does not necessarily have to be at the beginning. That is because products tied to monetary strength are typically accessible with a brand-new banking relationship and as a result, you can add a bank to your portfolio without much hassle when you need these specific products.
There are other creative non-banking product suites for treasury management which deliver sophisticated treasury management with the right end results. Those solutions negate the need to keep all your money in the bank. As long as those 3rd party treasury solutions are capable of freely moving money in and out of a bank account, that is a valuable tool to have while earning better rates and spreading the risk.
Rewards, Fees, Rates and the like
Why it is important: While these may seem like an afterthought for most businesses, it can really add up. After all, “fee income” is one of the biggest revenue streams for a bank and that comes from you, the account holders. Credit card fees, Wire fees, maintenance fees, document fees, ACH batch charges, FX rates, all fall into this category. In total, it could be the cost of your annual company party! On the flip side, look for rewards that can help your travel budget or other product discounts.
When to evaluate: This again is something you must decide at every pick of an account, as fees and rewards add up from day one. Reading the fine print can help eliminate pain later on.
In conclusion, your banking relationship must be evaluated based on your specific needs and periodically.
While it is possible to find a single bank that fits most of your needs, it is advisable to work with multiple banks that are more horned up in different areas.
That would enable you to spread your risk, run your business efficiently and at the same time be ready for the unforeseen.