Learning to Live with (or Without) Your Banker

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How much attention? Even the Feds are getting into the act, exhibiting surprisingly keen interest in the small-business-lending sector. The FDIC Improvement Act of 1991 mandates that financial institutions include their small-business-lending data in their annual call reports. (The act requires banks to report small-business loans of less than $1 million; previously, they reported total loan volume with no breakdowns by size.) The idea is to provide consumers (and fellow bankers) with a more accurate picture of a particular institution's small-business-lending activity. The Small Business Administration is in the middle of a study that analyzes small-business call-report data by state and ranks banks in terms of their service to the small-business market. As the study's director and the SBA's chief economic adviser, Robert E. Berney, states in the conclusion to a draft of the study, "The goal of the study is to make more credit available to small-business borrowers by increasing the knowledge of consumers' banking services. Knowing that some successful banks are active small-business lenders will hopefully encourage other banks to compete for the small-firm customer."

So with the banks fighting over you, what should you keep in mind when you're setting up a banking relationship, or rethinking your current one? We spoke to a variety of Inc.'s constituents, as well as to respondents to a banking survey conducted for Inc. by the Executive Committee (TEC), to determine what's happening in small-business banking from an entrepreneur's point of view. Companies we spoke to ranged in size from $50,000 to more than $50 million in revenues. Based on those conversations, we developed a checklist: six key questions you should ask yourself about your banking relationship.

1. Do You Really Need a Bank?
The answer to this question, predictably, depends on whom you ask. "Theoretically, small business does not need a bank today. Period." Charles Wendel, a banking consultant and author, makes that point in his new book, The Middle Market: An Integrated Approach to Increasing Share and Profitability in Banking's Most Dynamic Market (Probus Publishing, 1994). He cites AT&T credit cards, mutual funds, brokerage houses, leasing companies, and commercial finance and asset-based-lending firms as just a few of the many alternative financing options available for small companies in today's marketplace. "The point is that there are a lot of nonbank providers of both transaction processing and investment or borrowing services for small businesses," says Wendel. The competition is such that banks risk losing market share as companies migrate to those alternative providers, he adds.

Our TEC survey findings bear Wendel out. Although the majority of the 235 surveyed company owners still rely on commercial and savings banks for most of their financial needs, that group of bank customers shrank several percentage points from 1989 to 1994. In contrast, those who use investment banks more than doubled their ranks over the five-year period. Use of credit unions, life-insurance companies, stockbrokers, and leasing companies remained about the same.

Wayne Miller, whose MicroVoice Applications Inc. was the 1994 Emerging Entrepreneur of the Year winner and also #5 on the most recent Inc. 500 list, is one entrepreneur who is distancing himself from traditional banks. When asked to characterize his relationship with his bank, the former accountant replies, "I have virtually no relationship. I deal with my broker [Merrill Lynch]." MicroVoice, which develops software for the rapidly growing interactive- voice-response industry, is in the enviable position of being cash rich -- to the tune of about $5 million. According to Miller, one of the reasons he "had a hard time with" his original bank was its inability to pay him interest on those reserves without making monitoring his accounts a full-time job for someone in-house. At Merrill Lynch, Miller has a corporate checking account that automatically sweeps excess funds into an interest-bearing mutual fund on a daily basis, "even while I sleep," he says.

Spurred by Merrill Lynch and other brokerage houses, many banks (particularly the large ones) are beginning to offer versions of automatic-sweep accounts like Miller's, but they are still the exception rather than the rule. Merrill Lynch finance manager Tim Klitch, who spent 10 years as a loan officer, says that banks have a financial incentive not to offer sweeps. Thanks to a federal regulation known as "Regulation Q," a corporation cannot own an interest-bearing checking account. As a result, says Klitch, one of banks' biggest profit centers is idle deposits sitting in checking accounts. "A bank doesn't usually approach a client and offer to sweep. You've got to go and get it," he says. "It's pretty much like pulling teeth."

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