To the average businessperson, the world of business banking is a mystery – and you’d be forgiven for thinking that the banks like it this way. Their processes and procedures seem specifically designed to be as opaque as possible, such that your interactions with them (particularly credit decisions on loan applications) cannot easily be challenged or questioned.
This blog post will attempt to shed some light on this shadowy world. I’m going to tell you three pieces of information that bankers will never volunteer, and which will help you to understand a little better how business banking works.
Note that the following advice is mostly applicable to those that fall into the “commercial banking” segment – generally those with loans of at least $500,000 and/or turnover of at least a couple of million dollars. Banks tend to be a lot less flexible in the sub-$500k bracket, although you could certainly try the strategies in point 3.
1. YOUR BUSINESS BANKER’S SKILLS AND KNOWLEDGE ARE MORE IMPORTANT THAN YOU THINK
Business bankers generally seem like powerless salespeople. Almost every time you ask for a loan, they tell you it has to be approved by someone else – one of the “faceless men” in credit, to borrow an expression from the political sphere. As such, many businesspeople make the mistake of just treating their banker as an information courier, rather than really engaging them in detailed discussions about the state of their business, their strategies and future plans.
Incompetent business bankers like you to think this way; it makes it easier if they can blame “credit” if they need to deliver bad news to you. However it isn’t true to say that the banker has no influence at all. A good banker is a valuable advocate and conduit between your business and the credit department; their understanding of your business and their ability to construct a convincing argument can be the difference between a loan being approved and declined. It can also have a substantial bearing on the price of your loan.
What makes a good banker? Specifically, there are three skills they should possess in order to be an effective advocate for your business:
Communication. If your banker can’t turn your discussions and information into a convincing, eloquent document for consideration by credit, they are going to find it much more difficult to have loans approved. Think about how your banker communicates with you; do they make frequent spelling errors, or are their sentences poorly constructed? If so, you may find they struggle to write a convincing loan application as well.
Accounting. I’m not suggesting that any business bankers without accounting degrees are useless, but an effective banker should definitely know their way around a set of financial statements, as well as having a working knowledge of practical accounting. It’s the surest way to gain the trust and confidence of their credit manager, and is vital to getting loans approved quickly and at the best possible rate. If your banker looks at you blankly when you discuss your latest set of financial statements, it may be time to find a new one.
Influence. Even if your banker’s written communication skills and knowledge of accounting and business are first-rate, there is another skill they need to possess in order to be the best possible advocate for your business: influence. This means being able to think on their feet, having the ability to speak persuasively and confidently, and being generally liked and respected by their colleagues.
In determining whether your banker has this skill, consider how impressive they are when presenting to your business. Are they an effective advocate for their employer? Do they appear knowledgeable; are they able to present in an authoritative and persuasive manner; do you naturally feel like saying “yes” when they propose a course of action? If so, they will probably do the same for your business.
2. CREDIT POLICIES ARE JUST GUIDELINES
Every bank has written guidelines, variously known as “underwriting standards”, “credit policies” or just “policy”, which are designed to ensure that business loans are approved in a consistent and prudent manner. A few of these policies are non-negotiable, but the vast majority are flexible to some degree or another – and it’s up to your banker to argue the case on your behalf. This is why banks have credit departments rather than computer scoring for business loans – they know there will be an element of subjectivity to each application.
Good business bankers will see credit policy for what it is – simply a set of guidelines. If they personally believe that your loan application is strong enough to warrant approval, they will mount a persuasive case to their credit department (with whom they will already have a good relationship), and will very rarely have an application declined. If they do see potential issues or think your application is marginal, they’ll discuss that with you upfront – and still do their best to get the deal done. In the rare instances they see an insurmountable hurdle, they’ll let you know straight away, and then use their expertise to help you get your business into a more “bankable” position.
A poor banker, on the other hand, sees credit policy as an immutable set of rules, as well as a convenient excuse to hide behind when they fail to have a loan application approved. They will often be surprised if a loan application is declined, and will never take responsibility – it will always be someone else’s fault. Their most common lines to explain a declined application will be “it didn’t meet credit policy” or “the credit manager couldn’t get his head around it” – both of which are code for “I was unable to articulate a convincing case for approval”. If this sounds like your banker, I’d be heading for the exit ASAP.
3. PRICE IS NEGOTIABLE (AND THEIR FIRST OFFER IS USUALLY NOT THEIR BEST)
The higher the price a banker can extract for a loan (i.e. the higher interest rates and establishment fees they can convince you to accept), the better for them. Discounts are achievable from the “scale” or default price, but the greater the discount, the higher up the chain the banker must go for approval. This takes time and detracts from the revenue earned by the banker’s portfolio, and so they are usually reluctant to sharpen their pencil unless you give them a compelling reason to do so.
Here are a couple of ways to shave some points off your interest rate and lower your establishment fees for new loans:
Ask. This may sound simple, but if you don’t let them know that price is important to you (and in my experience many clients don’t), then you won’t get the best rates. The best approach is to get proactive: before the loan application is even submitted, talk pricing with your banker. Get them to give you an estimate of the rate and establishment fee, and regardless of whether you think it’s a good deal or not, tell them it’s not good enough. Have the same conversation again once the loan is approved, at the time documentation is issued – at this point I suggest actually crossing out the pricing, writing your own and initialing the change. Cheeky? You bet. Does it work? More often than not, yes – at the very least it will initiate a negotiating process.
Don’t put all your eggs in one basket. You should always maintain relationships with at least 3 business bankers from different banks, even if you don’t currently have any loans or accounts with them. Take them for a beer every now and then; get into the habit of tendering out stand-alone loans like equipment finance; and every once in a while, give them the opportunity to present a proposal to take over as your primary banker.
Most importantly, don’t keep these activities a secret from your main banker. Make sure they understand there is always competitive pressure, and that if they don’t consistently give you good rates and service you will walk. Don’t be mean about it, just upfront; in banking the squeaky wheel gets the grease, and it’s a huge embarrassment for any banker if a good client refinances to another bank, so a gentle reminder every now and then should suffice.