Take Three Steps Closer To Financial Success

Area Bankers Give Their Best Advice on Business Owners’ Frequently Asked Questions

Question 1: In the past year, what has been the most significant change in banking that affects the relationship between business owner and banker?

Regulatory changes. Our small-business customers rely on their banks and bankers for quality consultative advice; however, these changes continue to roll out to banks and continue to “evolve” as we try and explain them to our business customers and prospects.  To name a few, significant changes in appraisal requirements, flood insurance, verification of income and liquidity, referrals to mortgage experts within the bank, etc.  While these changes are being instituted to further protect shareholders and depositors (taking undue risk) and in most cases these changes have strong merit, it is a very difficult conversation to have with our business customers, as it may create additional costs of doing business to them. Banks do their best to stay on top of these changes; however, they sometimes come in faster than banks can absorb and address internally.
–Sandy McCandless, senior vice president and regional manager, U.S. Bank

The most significant change is the number of banks that are actively lending. This presents both opportunity and risk to the business owner. The opportunity lies in the ability to obtain financing on more favorable terms or, even more important, to align themselves with a banker who may better understand their current business needs or the dynamics of the owner’s business so the business can be positioned to take advantage of opportunities as they arise. It is always better to have your financing lined up before you need it rather than waiting until you need it. The risk to the business owner is they make a short-term decision based upon rate to align with a banker who is more concerned with meeting monthly or quarterly sales goals rather than providing a consultative approach to the business owner’s current and future needs.
–Ted Kraizer, senior vice president, Community Lending Division, Pulaski Bank

In the challenging economy, we are working with our business clients – large and small – about how to manage their business smarter and more efficiently. Our technology can help our customers manage cash flow more efficiently than they did a year ago. They have better access to credit and will continue to grow and upgrade their equipment.
–Craig Friedman, vice president and senior manager, media relations, PNC Financial Services Group

During the past year, we have continued to see economic growth and improvement.  Bankers have taken advantage of watching their clients’ and prospects’ companies improve, which in turn has spurred quite a bit of competition in the St. Louis market. For the business owner, this competitive market has been a positive. Banks have become more creative on structuring credit, and interest rates continue to be low. Business owners have benefited from the increased competition by forming stronger relationships with their banker.
–Stacia Peterson, senior vice president, commercial lending, The Business Bank of St. Louis

Businesses now have so many more options as to how they bank. Tools like online banking and remote capture have been very positive for businesses, giving them additional access and time efficiencies. However, it’s also resulted in businesses not having to call or visiting the branch as often, and that has made it increasingly important for bankers to reach out to their business clients more frequently. This is still a relationship business, and understanding the nuances of any business takes face time.  Businesses need to expect their bankers to call or visit them so the banker can truly get to know the business and how to best help.
–Sandy Washington, BMO Harris Bank

The competitive environment in which banks operate today is creating both opportunities and challenges within these relationships. Banks are flush with cash and eager to lend.  Other investment opportunities for these institutions aren’t too attractive in today’s environment. Yet the pace of improvement in our economy isn’t yielding tremendous investment and growth opportunities for banks to target with this liquidity. The result is an incredibly competitive environment with banks chasing every possible deal. At first glance, it is easy to assume the borrower would win in this equation, as banks are tempted to compete on pricing and structure, and there is no doubt borrowers are benefiting from these circumstances. But loans sold on price and structure can degrade the importance of relationships in these transactions, which can certainly precede problems for both parties over time.

–Greg Dryden, senior vice president, senior commercial banker, Fifth Third Bank

Over the past 12 months, the most significant change in banking that has most impacted the relationship between business owners and bankers would have to be increased regulations in mortgage lending. It is typical for business owners to request a mortgage loan from their primary bank. Self-employed individuals are required to supply an inordinate amount of information regarding their business, and source of income, to properly document the mortgage loan application. While the regulations continue to tighten, which require banks to properly document all income, the process is nothing new. In our fast-paced environment, every second counts, so the more time a business owner has to exert providing information to their banker, the more stress can be caused on the overall relationship. At St. Johns Bank, we try to minimize the amount of time it takes for a mortgage loan application by providing a detailed list of items up front and, for existing customers, maintaining a current set of financial information on an annualized basis. We find this shortens the application cycle and makes for an overall better customer experience.
–Max M. Mitts II, senior vice president and chief lending officer, St. Johns Bank & Trust Co.

I think there are three significant issues and changes impacting local banks. First, the amount of new regulation is crippling to the community bank model. As an example, our organization has created an entire department to support the new requirements. Now you may not think these changes impact business lending but they do. If a business owner wants to use his or her personal residence as collateral for a loan, new disclosures are required. This most likely will drive up the cost to obtain a loan and will definitely slow the process. Second, loan demand continues to be slow thus I am beginning to see some banks relax credit standard. This may be good for the individual borrower, but it is a troubling trend to me as a banker. Finally, while rates remain low, we are starting to see inflation impact manufacturing cost. If this trend continues, finished products will have a higher cost thus the end purchaser will pay more.

–Mitch Baden, executive vice president and COO, Royal Banks of Missouri

Question 2: Can you speak to a recent success in small-business banking that you have been involved with?  If so, what lesson can other business owners take away from this situation?

Recently a small business was given an opportunity to significantly expand a product line to a large Fortune 200 client. This product line needed a large percentage of material to be manufactured overseas, shipped back to the USA, then packaged and delivered to the end buyer. The small business felt a large increase in a line of credit was needed, as the overseas manufacturer was demanding 30% up front, 30% as a percentage of completion, then 30% upon shipment. A deep conversation resulted in a standby line to support import documentary letters of credit. In addition, the bank could absorb the documentation “risk” associated with the importation of product and also save the customer significant interest expense by not needing line draws too early in the process.  Lesson learned by the small business – don’t just do what your customers demand of you.  Utilize the resources of your bank/banker to come up with alternative solutions.
–McCandless

I have been a very big proponent of the SBA 7(a) lending program. The SBA gets a bad rap of working with borrowers who cannot find financing elsewhere. The truth is the SBA 7(a) program can be used by a growing company to execute its business plan in a much shorter time frame than traditional bank financing, with the small difference in cost being made up by increased profitability in a matter of months, without giving up equity in the business. Again, it is important that the business owner aligns him or herself with a banker who truly understands their needs and the tools available to meet them.
–Kraizer

Technology for large companies has been scaled smaller. Our PNC Cash Flow Insight is the lifeblood of any business, which makes managing cash flow a top priority. The online financial management tool helps customers better analyze and monitor their companies’ financial performance and make smarter financial decisions. It enables our customers to recognize and act on business opportunities faster and more efficiently.
–Friedman

Recently our bank helped a small business structure a plan for growth with an SBA and a conventional loan. We also helped to restructure their cash management products. All in all, it was exciting to provide growth opportunities for them as well as enhance their cash management, all of which will be a huge stimulus for that business!
–Peterson

One of the biggest leverage points I’ve seen for small businesses is to consolidate their banking. A business owner’s time is at a premium, and making banking easier can go a long way to helping them spend time on what they are passionate about, and that’s their business. By putting their business and personal banking relationships together through a trusted banker, they can work with someone who has a full understanding of all their banking needs and can better help the business owner get the most out of their banking.  We have what we call Premier Banking that brings together all the appropriate banking partners, such as business, personal, mortgage, etc.  It’s been invaluable to our customers, and we’ve seen a lot of successes through this method.
–Washington

A recent success in small-business banking I was involved with comes from financing two loans for a woman-owned business in the area that resulted in a significant monthly cash flow savings while also simplifying her overall debt structure. As is often the case, business owners are not always aware of the types of loan programs that are available to them. I was able to provide solutions to the customer that had not been recommended by her previous banker. While we do not want to see our customers seeking advice elsewhere, it is a good practice for business owners to ask their banker plenty of questions regarding their financing options. At St. Johns Bank, our loan officers pride themselves on staying in constant communication with our loan customers and consistently looking for finance options to simplify their cash flow and overall debt structure. Of course, we welcome questions from noncustomers too. By listening to their overall objectives, we can provide business owners with enough knowledge on our loan programs to enable them to make their decision on financing solutions. St. Johns Bank intends to continue its key philosophy of lending money to sound borrowers that are interested in a productive business-banking relationship.
–Mitts

This is a great time to be a small business client. Loan demand is low so every lending opportunity is critical for financial service providers.  The weak lending market has created a continued low interest rate environment and favorable credit structures. Additionally, technology is developing so rapidly that smaller companies have access to products traditionally available only to larger firms.
–Baden

Question 3: What is the outlook for gaining financing moving forward in 2014?

Think supply and demand. Most banks in St. Louis have survived the economic downturn, have shored up their balance sheets and capital, are flush with deposits (liquidity), and are once again in the loan game. Additionally (and in a lot of cases), banks have short memories, so they are starting to revert back to overly relaxed underwriting standards and structure (that’s the supply). Add on an extremely competitive pricing period, and you have a lot of banks chasing the same opportunities (that’s the demand).
–McCandless

The outlook is better than it has been in several years. The box of what is an acceptable credit has widened appreciably over the past year or so, and the level of competition is as great as I have ever seen it.
–Kraizer

 Following a severe winter that froze economic growth, the PNC Economic Outlook we released in April shows small-business owners now forecast sunnier days for the next six months. PNC has plenty of options for business owners. It starts with a cash flow conversation to see how their business works. Then we recommend a number of solutions, including credit, treasury management, Cash Flow Insight among them.

–Friedman

Now is a great time for businesses to obtain financing. We are seeing positive trends for most of our clients, which shows new growth in the economy. Banks are active and willing to lend, which allows businesses to take advantage of several different products and services.
–Peterson

Overall the outlook is good. Pricing is competitive right now, and that’s a big advantage for small businesses. We’re seeing businesses beginning to feel positive about the economy and their ability to grow, but the fundamentals of securing financing are still important. Small businesses need to work closely with their banker to find the best source of capital. Are you looking for a short-term infusion of cash, or are you looking for a long-term loan to fuel expansion? Being specific about your goals will make a big difference in the options for funding. Before talking with your banker, update your financials. Any lender will want to know that you have a good handle on cash flow and collateral. If you’re not sure where to start, talk to your banker or take advantage of the many resources and tools available for small business. SCORE is a wonderful resource, for example, as is the SBA. Visit www.stlouis.score.org for all sorts of templates, tools, workshops and other resources. Our website also has a lot of tools and information in our small-business section at www.bmoharris.com.
–Washington

I think we will continue to see low rates and favorable terms. Business owners who are prepared, understand their financial statements and are willing to find the right banking partner will have strong interest from lenders!
–Baden