Matchmaker, Matchmaker, Find Me a Bank!

Banks and their customers get along to varying degrees. Some relationships resemble long-standing and loving marriages like that of Paul Newman and Joanne Woodward. Others are more the Bruce Willis-Demi Moore type, with constant bickering leading to breakups.

As the financial services equivalent of a marriage broker, you perform a vital service when you are able to match clients with the right banks. To do so successfully, though, you must fully understand each clients business and its needs, anticipate the measures of the clients financial performance the banks will be most interested in and know as much as possible about the lending policies, services offered and loan officers personalities at several banks.

For starters, you should make sure you know enough about the clients business, especially its cash management and capital needs. Is your clients company growing rapidly? Is it in a cyclical business? A seasonal business? What is its credit history? Is it a new company without much of a record? Has it had credit problems in the past or does it have a sterling record? What are its tangible assets? How about its risk profile and customer base? Does it have a lot of customers or only a few? How big is its payroll? A CPA needs to consider everything that might affect the clients banking needs, because he or she will in essence be acting as the CFO for the client.

Before you and your client meet with any bankers, make sure that your client has a written business plan. This should provide standard information such as market share statistics, bios of the key officers and plans for expansion, as well as financial statements, estimates of working capital and long-term capital needs for the next few years.

Of course, banks are particularly interested in financial performance. Therefore, the clients financial history is of utmost importance to the bank and should be included in the package you and your client show the bank up front. Go back at least three years if possible. To tailor the information to a banks needs you might want to include statistics provided by Robert Morris Associates, the Philadelphia-based financial information clearinghouse. Robert Morris maintains a massive database on bank loans, containing information collected from most banks and aggregated in a series called statement studies. These studies are available to companies as well as to participating banks, which often use this service to compare a company with its industry peers on measures of working capital and long-term debt leverage. You can smooth matters for your client, be a step ahead in the game and show your savvy besides by providing the bank with the Robert Morris data on your clients peer group and knowing how your client stacks up against other companies in its SIC (standard industrial classification) code. The bottom line: You want to anticipate everything and anything a bank might request and provide it at the outset.

That’s certainly the tack taken by Dan DeVasto, CEO of Wolf & Co. PC, a Boston-based CPA firm with 10 owners and 45 CPAs. Before approaching a bank, he makes sure he has every relevant scrap of data on his client: a mission statement, list of products and services, outlook for the industry, description of the competition. Typically, he approaches a bank with a 15- to 25-page spiral binder detailing this information. The key is to have the banker thoroughly understand the business, says DeVasto.

To make a successful match, you also should understand as much as possible about the banks you plan to approach on behalf of the client. Most bankers network furiously, and CPAs are among the people they court most ardently because CPAs clients are a promising source of new business. Thus, the first step is easy: Sit back, wait and let the banks come to you, the CPA. Many banks hold annual get-togethers, barbecues or cocktail receptions, which provide CPAs with an opportunity to get acquainted with loan officers. We absolutely actively seek out CPAs, says Hattie Hamlin, a vice-president at Crestar Bank, a regional institution headquartered in Richmond, Virginia.

You’ll want to dig much deeper, of course, when it comes time to actually match a bank and a client. As a CPA with a variety of clients, you are in a good position to check the references of banks by talking with other companies that use their services, especially companies in the same industry as your client. Ask your other clients about their relationships with their banks, what they like and what they don’t like. Talk to local chambers of commerce or economic development offices to get a sense of a banks community involvement. If a banks going to check out your clients finances, its only fair to check out the banks own finances in turn.

Annual reports are a great source of information on banks, provided the banks are public institutions. Publicly held banks also file quarterly reports and other financial statements with the SEC in Washington, D.C. Information from these filings can be found in the EDGAR database on the SEC’s Web site (www.sec.gov).

For private banks, the FDIC oversees banks, while the Office of Thrift Supervision oversees savings and loans and thrifts. While regulatory data filed with them is public, it can be difficult to access and interpret. Instead, try Austin-based Sheshunoff Information Services, which offers dozens of products assembling and massaging the data, including custom-tailored reports. Prices vary: A one-time paper copy of a single bank’s financial statements will run $115, while quarterly CD-ROM updates on all the banks in a given state cost $825. Sheshunoff provides its own ratings on the most important measures of bank health: capital adequacy, earnings, liquidity and asset quality. Those ratings are updated quarterly. A one-time list of the Sheshunoff ratings for all banks and S&Ls in the United States runs $125, while an annual subscription is $495.

SIZE MATTERS
You’ll also want to pick the right size bank for your client, whether its local, regional or international. As a simple rule of thumb, a client will be well matched with a bank that has a similar geographic reach. A company operating exclusively in the Mid-Atlantic region probably gets the best service from a bank in the corresponding region. A client may be too small to get good service from a larger bank, but a purely local bank may not be able to provide all the services a small client needs.

But what happens if a regional company suddenly needs an international service such as currency exchange? If the client is important to the bank, but the bank can’t provide the service itself, the bank should provide the service through alliances with a bank that can. If currency exchange is important to a client, make sure to ask the bank about its arrangements. Even many tiny banks work with Citibank and the like on international services. Of course, a company may need to reconsider its banking relationship as it grows and its financial situation changes; it should make sure it is working with a bank that can accommodate its full range of service requirements.

MATCH BANK LOAN POLICY TO CLIENT CREDITWORTHINESS
Once you have some solid banking candidates, you’ll want to check out their stances on loans. This is perhaps the single biggest issue in a banking relationship. Chances are the client is going to need some kind of financing, whether it’s a working capital loan, a term loan or a line of credit. Get a gauge of the banks lending philosophy. Too conservative and the bank won’t help your client, particularly if your client has a shaky credit history. Too liberal and the bank itself may be in for trouble down the road. The best way for a CPA to explore a banks lending philosophy is to approach the banker with specific questions. Don’t merely ask, What’s your lending philosophy? Describe the client as, say, an importer with less-than-stellar cash flow history, and see what reaction you get from the banker.

Also, find out who makes the decision on a loan. Ideally, the local loan officer who understands a clients business is the decision maker. That leaves latitude for personal judgment. However, merger mania has grown many banks into impersonal Goliaths. Loan decisions that once were made by individual bankers at the local level, people who knew their customers well, may now be made by computers programmed for automated credit scoring. In other words, loans are approved or rejected based on a strict formula that takes into account factors such as a client’s income and number of years in business. In too many cases, the loan-approval process has become formulaic, anonymous and committee-based. Your client isn’t going to be well served if loans are approved at a banks headquarters three states away, says Mark Taylor, director, Crowe, Chizek LLP, a firm with 100 partners in South Bend, Indiana.

Taylor tells of a small local manufacturing company that he matched up with a bank able to provide a local loan officer. On a regular basis, the loan officer visited the plant site. He got to know the company as its operations expanded and came to thoroughly understand its financial needs. Certainly, credit scoring would have been a poor substitute for the loan officer’s firsthand knowledge of Taylor’s client. The personal touch made for a much easier relationship, he says.

ALTERNATIVES TO BANKS
If banks seem reluctant to meet a clients credit needs, look to alternative sources of financing. The client may be eligible for an SBA loan. The SBA’s loan regulations are immensely complicated, so you’ll need to approach a bank that has experience in this area. To find one, go to your state or district SBA office or visit the SBA’s Web site (www.sba.gov). You might also look to industrial finance agencies, venture capital firms or high-risk asset lenders, among others. Check with the state CPA society; some states have a committee on alternative financing sources.

Denver-based DataMerge Inc. provides a number of interesting Web links through its home page (www.datamerge.com). DataMerge’s Financing Sources Databank is a national database of alternative lenders and equity investors, including profiles on their lending policies or investment criteria. The company also offers loan proposal software.

The bottom line: Don’t narrow your search to banks (see sidebar). The walls between banks and other types of financial service companies are crumbling, with each offering services once the exclusive province of the other. Banks now offer mutual funds and insurance products, for example. Meanwhile, brokerage houses can provide checking accounts.

BEYOND LOANS: OTHER USEFUL BANK SERVICES
Aside from loans, a whole slew of services might benefit a client. Many banks can handle company payroll and direct deposits into employee accounts. Or, according to IRS requirements, they can do electronic tax filings on a monthly basis. Some banks can maintain employee retirement savings programs such as 401(k)s. Determine which services a client might want and select a bank accordingly. Typically, you can get daily, weekly or monthly reporting of transactions, automatic reconciliation of accounts and even extremely detailed reporting of debits and credits.

A mom-and-pop grocery might require only the most basic services, such as checks sorted by number. A midsize realtor, meanwhile, might require more sophisticated cash management services such as a sweep account (a customized checking account that automatically rolls excess cash into investment vehicles). When a client’s sweep account balance gets above the accounts limit, say, $10,000, the surplus cash can be swept into a mutual fund or an interest-bearing bank account. Sweep accounts can be customized any number of ways and can feed into most any kind of investment, stocks, bonds, treasuries, depending on your client’s risk profile.

Lockboxes are another valuable service provided by many banks. If customers mail checks to a client in large volume, this might be an option worth considering. A lockbox is a bank-maintained account to which customers can send payment, usually via a P.O. box. The bank then processes the checks and deposits the payments directly into the company’s account.

WIRED OR NOT?
Other services worth exploring: wire transfers and letters of credit. A wire transfer allows a company to move money directly to the bank of a customer or vendor without paperwork. A letter of credit may be necessary if a client is called on to do a big job and a vendor isn’t confident about receiving payment; its a guarantee from the bank that if the client cant make payments, the bank will fork over the cash instead. Banks’ policies vary on wire transfers and letters of credit; make sure you pick a bank that can meet the client’s particular needs at a reasonable price.

Banks also vary in how they deliver account information. Some are fully wired, facilitating e-commerce. Others remain in the analog age and do everything with good old-fashioned paper. Companies exist along the same continuum. Some clients are very excited about electronic banking, while others could care less, says CPA Lamar Stoltzfus, one of 17 partners with Beard & Co. in Reading, Pennsylvania.

Once again, the issue is matching client and bank. A high-tech start-up may want the latest services, such as online check clearing, so it can pay its vendors from a PC. Another client may like to receive bank statements on CD-ROM (yes, some banks can provide statements in this format). The owner of a small town hardware store, meanwhile, might like to receive monthly bank statements in the mail and keep canceled checks in a shoebox.

FEES FOR SERVICES
Now a word on fees: With interest rates low, banks aren’t able to depend as much on spreads, the differential between the interest rate on deposits and the interest rate on loans, to make money. Instead, banks try to make more profit from fees. Stop payments, overdrafts, wire transfers, each carries a fee. Most banks offer more than 100 products and services. They’ve gone over their lists and are trying to increase fees wherever possible, says Charles Wendel, president of Financial Institutions Consulting, a New York City strategy firm that works with banks, credit card companies and insurance providers.

Five years ago, Wendel says, the fee for a stop payment for a small business was typically $5 or $10. Now it’s about $25. Nearly across the board, banks have upped the charges when account balances fall beneath certain preset levels. When you meet with prospective banks, obtain rate schedules listing fees for their services. Bank fees can be all over the place. One bank may slap a 0.5% fee on a letter of credit; another might charge 1.5%. However, the good news is that competition between banks is fierce. Don’t be shy about making banks work for your clients business. Armed with rate schedules from several banks, demand that the fees attached to various services be lowered. Stack them up against each other, suggests Wolf & Co.’s DeVasto. In today’s environment, banks have to be very competitive about rates.

DeVasto cites the example of a client in the retail business that attracted nibbles from three different banks. DeVasto obtained rate schedules and played the banks off one another. The winning bank came on very aggressively, agreeing to reduce the interest charged on loans by 0.5%. That bank also agreed to increase its asset lending base from 70% of inventory to 80%.

TWO BANKS MAY BE BETTER THAN ONE
With this in mind, why limit your client to just one bank? The banking industry is consolidating. Loan officers come and go constantly. The individual banker that your client is dealing with today could be gone next month. Lending policy often changes after a merger. To provide fallback options, a prudent company may want more than one banking relationship, even if the second is only on a limited basis. For instance, your client could obtain an asset-based loan from a second bank. That way, were the primary bank to merge into a Goliath based light-years away, a second bank would already know your client.

Even in this era of musical bankers, its still a business where relationships matter. Thus, one last caveat: Don’t make your banking decision strictly based on rates. After you’ve weighed the services and fees and whatnot, you still want to go with your gut. The $64,000 question remains: Which banks loan officer is most likely to see eye to eye with your client? Says Beard & Co.’s Stoltzfus: Once you get past the numbers, a lot of it comes down to touchy-feely stuff. Who will work well with my client? It’s still a people business.

Services Banks Might Offer Your Client Which of the following services must your client have? Which would the client like to have? LOANS AND CREDIT PRODUCTS Term loans. Lines of credit. Revolving credit lines. Letters of credit. Commercial mortgages. Credit cards. Leasing products for computers or equipment. CASH MANAGEMENT SERVICES Checking accounts. Payroll/direct deposit. Wire transfers. Currency exchange. Lockboxes. Sweep accounts. Account reconciliation on a daily, weekly or     monthly basis. OTHER Insurance. Mutual funds. Online banking. Electronic payment to vendors. Retirement planning such as 401(k)s. Advisory services such as estate or succession     planning.