Now that many banks are making money again, lending officers and marketing specialists are claiming a hefty appetite for loans and cranking up pitches for their services. But small businesses looking for money have a little homework to do before they throw themselves at the feet of eager lenders. "Frequently, there's a big difference between the banker's sales pitch and what you can realistically expect," says Gabor Garai, a partner with the Boston office of Varet Marcus & Fink, whose specialty includes helping companies arrange bank financing. Before you get too excited about what it may be like to do business with any new bank, here are some key questions he recommends weighing:
1. Who's in charge? Many big banks separate the sales and credit functions. You may get along great with the salesperson who takes you to lunch, Garai says, but make sure you can communicate with the person you'll be dealing with day-to-day. At a minimum, he advises, you'll want the lending officer to understand your business plan and expected credit needs. And to avoid tying your fortunes to a lending officer who has no future at the bank, Garai says, "you should also try to assess the loan officer's track record there."
2. What's the bank's reputation? Ask around with accountants and lawyers, Garai says, and you're sure to find that some banks truly deserve their reputations as fickle lenders. One day those banks may love your kind of business (perhaps even setting up a special lending group to kowtow to your needs), and the next day they can't wait to be out of it. "I'd stay away from lenders that have a track record as fair-weather friends," advises Garai. Another thing to be wary of, he cautions, is a bank's tendency to sell its loans to other lenders. The risk: that the other banks will have different procedures and standards. One way to protect yourself, he says, is to ask for restrictions on your bank's ability to transfer the loan.
3. What kind of deal will the bank discuss? It isn't cheap to begin a new relationship with a bank. In light of recent events in their industry, banks are becoming more finicky about legal documentation. The result is higher legal charges and fees (for audits, environmental studies, and so on). Such requirements, notes Garai, can add thousands (even tens of thousands) of dollars to your financing costs -- and make great-sounding deals a lot less enticing. "Given the transaction fees and what they can do to the cost of financing, it's important to inquire up front about what you're in for," he says. If you do decide to go forward, ask the bank to give you an expense cap -- in writing, which Garai says banks are usually prepared to do. -- Bruce G. Posner