Even though news headlines indicate the economy is subtly improving, an important lesson learned by everyone from large to small business over the past year is the need to have strong banking relationships. Few businesses operate without some form of banking finance. Until liquidity is restored, the need to have multiple banking relationships is prudent to assure that businesses have adequate capital to operate.
Worries about the stability of banks have heightened since the Federal Deposit Insurance Corp. said recently its list of problem banks rose to more than 400, the highest level since June 1994. Presumably, the majority of these banks are local and regional banks, which are suffering due to large concentration of underperforming or nonperforming real estate loans.
Over the past year, it has been common practice by banks to reduce or eliminate relationships to shore up their balance sheets. Historically, small business owners have maintained one large relationship in order to gain better pricing on a package of services. Furthermore, these relationships tend to be with local and regional banks, the banks experiencing the majority of the problems. In an effort to protect your business, consider maintaining good relationships with multiple banks since you do not know if or when your existing bank might terminate your relationship. For example, consider maintaining basic banking needs such as depository services with one bank and longer-term lending needs with another, ideally a bank that specializes in your industry.
Leslie Thompson, CFA, CDFA, CPA
Spectrum Management Group