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When a Bank Wants a Deposit to Make a Loan

(Corrects the headquarters location of CapitalSource.)

I’m the treasurer of a nonprofit that recently purchased a for-profit window-cleaning franchise. We wish to use our endowment funds as collateral for a small business loan. The local community bank asked us to move our endowment money from a community foundation to their bank in order for the loan to be approved. Can it make this stipulation? —L.N., Washingtonville, N.Y.

A bank should not make your loan approval contingent solely on whether you open an account with them, but it’s not unusual for them to request that you establish a depositor relationship. In this case, the nonprofit endowment fund could help boost your local bank’s capitalization and give it easier access to the loan collateral if your window-cleaning business defaults.

If you’re uncomfortable moving the endowment money to the bank, talk to some other local banks about their lending practices and see whether you might qualify for an SBA loan guarantee.

"Banks should not require anybody to make a specific deposit in order to qualify for a loan, though they might ask you to open an account with them and then try to win your loan business," says John E. Batt, sales director at CapitalSource (CSE), a commercial lender based in Chevy Chase, Maryland.


A demand like this is less likely to be made when an SBA guarantee is in place, says Ed Harycki, founder and CEO of Swift Capital, a Delaware business that provides working capital to small companies. "In this financial and economic climate, [when] everyone is still nervous about credit, we’ve seen banks make a wide variety of requests that would have been uncommon a few years back," he notes.

For typical commercial loans, where there is no guarantee, it has become common for lenders to require borrowers to establish deposit accounts, he says. "This provides better overall customer economics due to the broader relationship. Also, the lender then has a direct window into the performance of the underlying business, which can help mitigate potential credit losses."

Although some indexes show that small business lending is on the upswing, credit is still somewhat scarce and lenders have all the leverage, Harycki says. "It’s clearly a seller’s market out there."

Talk to your loan officer further about the request and make sure your underlying nonprofit status is not presenting a loan eligibility problem for the bank, Batt suggests.

Dig deeper into your loan application and make it clear to the bank president or loan manager how your for-profit venture is related to your nonprofit entity. Make sure that each entity’s legal status is established appropriately. Then check to see if some uncertainty about the relationship is behind the request that you move your funds over, Batt recommends.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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