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To find the right bank for your business, check out its services, fees and people

Choosing a banker is one of a small business owner's most important tasks.

With the right bank, a small business gets more than a ladle at the money stream. A good banker can also provide advice for growing companies and services that help solve financial problems.

To find a good banker, treat the search as if you were hiring a key employee. Ask around to find candidates. If you're in a strip mall, for instance, see which bank the other tenants use. Find out who your competitors use.

Develop a short list of prospects, and then grill them with in-person visits. Experts say you should question your prospective banker closely about four areas:

  • Lending abilities
  • Services
  • Fees
  • People -- and their expertise
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Lending abilities
Startup companies usually aren't blessed with a healthy balance sheet. That means that getting a loan is the first thing on the mind of a small business owner who's long on dreams but short on cash.

While it's not a sure-fire litmus test, one indication of a bank's interest in making small business loans is whether it offers Small Business Administration loans -- and how often.

Many banks make an occasional SBA loan, but those who deal regularly with the agency are designated as certified or preferred lenders. The SBA delegates some authority over lending decisions to its certified lenders, and delegates complete lending-decision authority to its preferred lenders. You can search for certified and preferred lenders in your area through the SBA Web site's local resources page.

For any small-business bank loan, rates will vary widely, depending on your financial condition. "Every situation is different, and the rates can vary dramatically," says Al Salgado, region assistant director for the North Texas Small Business Development Center in Dallas. "Obviously, the higher the risk, the higher the rate."

As a benchmark, a small business with a good credit history and growing revenues can often expect to pay 1 to 2 points more than the prime rate for a loan of average length.

There's more to a loan than its rate, however. Find out how long it takes to get a lending decision. It should generally take two to four weeks. If you've provided complete paperwork, it's not unheard of to get an answer within a week.

Also note that every bank has a legal lending limit with respect to the amount of money it can lend any one borrower, and many successful small businesses often outgrow their banks. For example, your bank's lending limit may be $1 million, but you need $1.5 million to further expand your business. Many bankers will try to keep your business by enlisting another bank as a partner. It would share the risk by lending the additional $500,000.

Services
There's more to a good bank than a money spigot. It can offer payroll and cash management services that can help small business owners sort out their financial quandaries.

Here are some of the questions to ask your prospective banker:

  • What type of commercial credit cards do you offer, and what advantages does it provide concerning purchasing, travel and entertainment expenses, and bookkeeping?
  • What trust and investment services do you offer for retirement plans and portfolio management?
  • Describe what cash management services you provide, such as account reconciliation, electronic data interchange (EDI), wire transfers, lockbox services, check disbursement and archival, online banking, business checking accounts and short-term cash management vehicles.

In addition, inquire about whether the bank will help you establish credibility, or help you extend your business's reach if you are already established. For startups, a bank can help by waiving balance requirements on checking accounts and by issuing credit cards in the business's name. For larger businesses, it becomes more important to have people who can offer advice on everything from new markets to venture capital.

Fees
The flip side of services is their cost.

Will you save money by being able to go to its ATMs all over town -- or, if you travel, all over the country? What are the loan origination fees, the rate at which the loan is priced, and the monthly service fee?

Banks should give you a representative list of their fees, such as what it costs if you bounce a check. Do a comparison between banks.

You also should check your bank's financial stability rating via Bankrate.com's Safe & Sound rating feature.

People -- and their expertise
A banker's expertise, particularly within your industry, can contribute mightily to your success.

During your round of interviews with prospective bankers, listen closely to the questions they ask. If the questions display a knowledge of your industry, that banker will be better suited to help with problems and to understand the issues if you run into trouble.

Familiarity with your industry can even make a difference in loan approval.

"The primary consideration for choosing a banker is how well he knows your business," according to Richard Parlontieri, a former Ebank.com executive. "Many times, small business owners are turned down for loans by large banks because the banks don't understand their business."

Find out who you'll be dealing with. If it's a larger bank, there may be a small business specialist; with smaller banks, you may deal with senior officials, which can carry advantages.

The decision comes down to this: "With whom do you feel most comfortable?" says William J. Dennis, Jr., senior research fellow with the National Federation of Independent Business's education foundation in Washington, D.C. The federation is a trade group for small businesses.

With big banks swallowing up midsize banks around the country, the decision increasingly is becoming one between a huge multi-state bank and a small community bank. Each bank has its advantages.

Is bigger better?
"People say they don't have a bank, they have a banker," Dennis says. "Small business owners love the personal touch, but they can really pay for it, because sometimes larger banks can offer better rates and more services."

For example, when Seward Screw Products Inc. in Seward, Ill., went shopping for a loan -- and a new banking relationship -- it didn't take the lowest rate.

"We took the second-best rate because we felt more comfortable with that particular bank," says Lloyd Falconer, secretary/treasurer of the small business, which makes metal parts used in everything from agricultural machinery to Harley-Davidson motorcycles. Still, Seward Screw Products got a very attractive rate, partly because it's a fast-growing company with substantial annual revenues. "But of course," says Falconer, "it depends on how badly the bank wants your business."

Large banks offer such services as international money transfers, specialized checking accounts, credit lines and online banking programs. Then there's the convenience of having ATMs and branches around the country.

To counter the argument that they don't establish personal relationships with small businesses, some large banks, such as Bank of America and Citigroup, have small-business specialists in their branches or area offices.

"Continuity is very important," says Bank of America spokesman Jeff Hirshberger. "I'm not saying we don't have turnover in our staff, but people leave smaller banks as well. We promise that we will make someone available who is knowledgeable, not just someone who is making a loan and that's all."

Officials at smaller community banks counter that they give a small business owner a more personal touch, and that they can make loan decisions based on relationships, not just numbers on a balance sheet.

"We make a lot of 'character' loans," says Melvin Bassi, chairman of Charleroi Federal Savings Bank in Charleroi, Pa., 30 miles southwest of Pittsburgh. "There are people we'll give money to because we've known them for many years and we know their good reputation."

Employees of a small bank "will actually talk to you," Bassi says. "We understand someone's problems, and we aren't quick to pull the string if someone misses a payment."

Know when to switch
Be prepared to shop for a bank more than once during your business's life cycle. Your needs can change, and in these days of megamergers, banks change rapidly, too.

Curtis Fackler runs Payroll Plus, a small Spokane, Wash., company that handles payrolls for local companies. He has switched banks once in the company's early years, and he expects that he'll switch again someday.

"There are times when your bank might stop being the right fit for your business," he says.

Before he started his own business, he was the treasurer of a nonprofit that ran into a serious cash-flow problem. Although it had $2 million in assets, it needed $100,000 so it could meet payroll for two months while it straightened things out.

"We went to our bank and they just said no," Fackler says. "So did several others. We ended up finding a bank that would work with us, thankfully."

After the company decided to switch banks, Fackler went to his former bank to withdraw the company's $250,000 in deposits. "I wanted to make a point, so I took a suitcase and asked for it in cash," he says.

Bank officials wouldn't go along. Fackler got a check instead. Still, he felt he had made a point.

"There is no penalty in most cases for switching banks," he says. "Shop around. Deal one against the other. You have to know that the bank will be there when you have a problem."

Kyle Parks is a freelance writer based in Florida,
Kara Stefan is a freelance writer based in Virginia.

-- Updated: June 12, 2003

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