Now more than ever, a good bank is hard to find.
With a widespread credit crunch, a flurry of mergers, and the threat of new regulations, the relationship between banks and there small business clients is strained as never before. That has led many companies to consider switching backs. But closing one account and opening another is often easier said than done.It's no easy task to find the optimal bank for your business, though, and research indicates that "switching costs"—the hidden costs you incur when you leave one back for another—can be quite high.
So how do you know when it makes sense to move your account to a new bank?
The main pillar of what sets small businesses apart in terms of banking needs is lending. Even if you don't need a larger line of credit today – or in the foreseeable future – you should know whether your current bank has a trackrecord of lending money to companies of your size in your industry, according to Bob Seiwert, senior vice president of the American Bankers Association and director of the ABA's Center for Commercial Lending and Business Banking. Other considerations include whether your business could benefit from certain efficiencies or low rates offered by larger banks – or from having a personal relationship with a financial advisor at a small bank.
If your contemplating a swtich, here are some tips on how to make a wise long-term decision for your business – and how to make the transition as swift and painless as possible.
Switching Banks: Assessing Your Needs
It's natural to re-evaluate your company's banking needs every time an institution bumps up the interest rates it charges on a loan, or closes a nearby branch. But even if the customer service is satisfactory and consistent, most experts recommend reevaluating your financial needs every few years.
That's beccause your company's needs will change as it matures and expands into new lines of business—by adding e-commerce, for example. As an entrepreneur, you need to make sure your bank is aware of the changes in your business, and that it is able to address them with its products and services.
If you feel your current bank is fine for transactions but not necessarily a good strategic fit, begin looking at alternatives. Ask your CPA, your lawyer, and your insurance agent for a short list of bankers with whom you might click—and someone they would like to work with, too. "When you're looking for a banker, you should be looking for someone who fits in on that team, and who can give you good ideas on how to solve challenges when they're financial in nature," Seiwert says. "These people are not your board of directors, but they can work together to help you."
Switching Banks: Charting the Future
When starting the search for a new bank, it's natural to hone in on the service you are leaving your old financial institution for – such as small business lending or financial advising. But aon't allow that focus to eclipse all your other banking needs. And look as far into the future as possible.
If you're just starting out, for example, and think you only need a checking account to manage incoming payments from your clients and reliably handle outgoing checks, think again. "Free checking" will not suffice. What other services will your small business need in the next decade? Will you be expanding and need a larger line of credit in the future? Finding a bank that can work with you on that is most important to focus on, What else might your small business need in the next 10 years? Do you plan on staffing up or financing inventory? Will your revenue fluctuate seasonally? Do you expect to make significant capital expenditures?
"Even if you're not quite there yet, it's great to start that relationship early and so they know you when you need advice or a loan, and you're not just a guy on the street," says Jeff Rose, a certified financial planner in Carbondale, Illinois.
Building a relationship from which you can gain valuable advice on growing your small business, whether that advice is related to geography, sector, or basic cash flow strategies, can – and probably should – be a top consideration, Seiwert says. How can you tell if the banks you're looking at are relationship oriented? Look for a bank that is "proactive about giving you advice and ideas," says Seiwert—and not just explaining the features of its products and services.
Switching Banks: Comparison Shopping
Once you know all of the things your business needs from a financial institution – and can anticipate your future needs – comparing what banks offer in your area and worldwide is relatively simple. Search for banks that specialize in small business, and call them to request specific information, including additional services, fee structures, and interest rates.
Even though you're looking for just banks that will offer services for your small business, and small banks often are a great fit for businesses in their communities, it might be wise to start broad, Rose says. Look at all your options.
If you fall in the category of just needing simple account services, for example, you might take a look at the growing sector of online banks. When Elizabeth Potts Weinstein, an attorney and small business consultant, started her own business six years ago, she realized her priority was to have easy online access to her accounts – and most community banks she checked with didn't offer online banking. She went with a nationwide bank with an online banking system that fit her needs.
On the other hand, if location and face-to-face interaction is important to you, and easy access to deposits and cash is necessary, Potts Weinstein suggests: "Use a local bank with an extensive ATM network. Or, get into an institution that will rebate foreign ATM fees. But be realistic about the requirements for getting this done. Are you really going to provide the bank with ATM receipts?"
A credit union can be a great for a specific type of business. "A credit union has different regulations as far as what it must abide by for giving a small business loans," Rose says. "But if you do qualify, a credit union can be more competitive with its rates."
As you move closer to selecting a bank, pay close attention to the fees. The fee structure for business checking can be significantly different – and much higher – than those assessed by a bank on a personal checking account. Some banks will also charge small businesses for online banking services, even though they do not charge individuals.
Remember, as a potential customer, you have the right to ask for exactly what you need. If that's free online banking, make that clear to the bank manager when you speak with him or her. Or, if you're willing to pay for certain services, but need a representative to be available on a monthly basis to counsel you, let a potential bank know that upfront.
Switching Banks: Meeting with Potential Bankers
Before setting up meetings with potential bankers, review the bank's written literature, and create a list of questions. Seiwert, who spent 30 years as a banker, recommends asking some or all of the following:
• Do you have small business banking department?
• Are there any industries in which you specialize?
• Are there any industries that you avoid?
• What size company do you most often finance and serve?
• Will you assign an account or branch manager to work with my business?
• Do you have a wealth management or private banking group?
• Do you participate in the SBA loan program?
• Will I be able to export my bank account information directly into my accounting software?
• Does your bank provide account reconciliation services?
• Does your bank offer payroll services?
Switching Banks: The Smooth Transition
Congratulations if you've found a new banker. Now, how can you make the transition as seamless as possible?
First, see if your new bank offers advice on the matter – or what some banks call a "switch kit." Wells Fargo, for example, offers one tailored just to small businesses. It recommends that after opening a new account, a small business owner should transfer any automatic transactions to the new bank. Doing so entails notifying service providers and vendors who work with your business.
If you're going with a larger lender, ask foran Account Transfer Letter, or a similar form, that you can send to companies with whom you do business. Send it to any vendor or customers with whom you exchange automatic payments from your business accounts or with whom you do any merchant card transactions.
Next, contact your payroll service provider. You will want to make sure the company has adequate notice so your employees don't experience any delays or unexpected changes in their paychecks. Communicate well with your payroll department or provider about any changes to schedule, and be sure to notify employees of any systematic changes to the way they are paid.
It's not usually necessary to notify every business you work with of the switch, some mid-sized companies might choose to mention a change in banks in the company newsletter or in a periodic e-mail. If you are smaller, mention the change to only your closest business parties. But do prepare an explanation—should a supplier raise the topic, you will want your employees to memorize and repeat a simple party line.
Speaking of notification, one of the toughest parts of this process can be letting your old banker know you're leaving, particularly if your business is based in a smaller community. Don't burn bridges. "If you have a relationship with your bank or banker, I would sit down with the manager and discuss why you are leaving," Seiwert says. "You owe them the courtesy, and its a chance to thank them for their services."
Stop using your old account well before closing it. Wells Fargo recommends that businesses switching accounts "allow time for outstanding checks, debit card purchases and automatic payments to clear," which can take about 10 business days
Once you're certain that your accounts payable is caught up, and your accounts receivable have stopped depositing in your old bank, you'll need to formally notify your old bank you are closing your account. Make sure to take the time to review how your account balance will be refunded to you, what will be done with any stray deposits or withdrawal requests that come into the bank, and any other action that will be necessary on your part going forward.
Switching Banks: A Final Thought
If you like your bank but require a few additional services, you may consider maintaining accounts at different banks. Of course, doing so will require more intense internal accounting systems. If your business is growing more complex in terms of its banking relationship, you will definitely want a good team in place to help you keep track of your money. Your team should include, at a minimum, an accounts payable and accounts receivable professional, a bookkeeper, and a controller or a CFO.