What Small Business Owners Should Be Asking Their Banks Right Now

It’s been a rough year for banks, particularly regional and smaller banks. While we continue to coach our clients that these types of banks are preferred because of the personal relationships they foster, now is an important time to revisit those relationships and ask some tough questions.

Note we said, “banks” (plural). We firmly believe business owners need to have a working relationship with more than one bank. The main purpose of doing business with more than one bank is to keep your primary bank honest and aware in quoting rates for additional financing needs such as funding capital improvements, funding real estate or staying competitive with the rate on your Line of Credit. 

Of course, if your primary bank failed, you would obviously need a backup for critical functions like payroll. But beyond bank failures, other catastrophic events can happen to the bank, like a fire, cybersecurity breach, flood, or power outage.

Ask Your Banker Some Tough Questions

Set up an in-person meeting at the bank or a lunch with your banker and ask questions like:

  • How healthy are the bank’s financials?  How do their numbers compare to a year ago, five years ago, or even ten years ago?
  • What do they think the bank’s financials will look like in 6 months or 12 months?
  • What is the biggest loan loss they have incurred in the last 12 months?
  • What loans are they worried most about?
  • How exposed are they in sectors that are suffering right now, like commercial real estate (particularly office building landlords)?
  • How is the bank’s investment portfolio? Is it balanced and conservative or aggressive in riskier sectors like technology?
  • How do they think their bank’s financial stability compares with their competitors?

Take the time to dig in and get a sense of their level of worry (or confidence). If you are not satisfied with the answers or think they might not be telling you the whole truth, it’s time to look for a new bank.

Common (and Uncommon) Bank Disruptions

There are many common or uncommon disruptions that can negatively affect a bank and, in turn, any small businesses that work with said bank. The FDIC (Federal Deposit Insurance Corporation) will insure up to $250,000 for chartered banks. Still, even a minor stumble on the bank’s part can turn into a major disruption for a business.

Disruptions beyond bank failures (bank runs, bankruptcy) can be environmental disasters, pandemics (with COVID-19 being one of the most notorious), cybersecurity issues, and more. There may not be a foolproof way to avoid disruptions to a bank, but small business owners can protect themselves by working with several bankers.

We recommend small business owners have relationships with at least two different banks – that way, if there is a disruption at one bank, you can still rely on the other bank for important events, like payroll. Essentially, small business owners should be like the golfer who carries two putters (or two drivers, if you’re Phil Mickelson circa 2006) in case one doesn’t work the way they expect it to. Don’t put all your eggs in one basket – consider multiple baskets and even different containers.

Learning From Recent Bank Failures

Several large U.S. banks have faced huge issues this year. Silvergate Bank liquidated in early March 2023 after a series of miscues, most notably the run on the bank after cryptocurrency hedge fund FTX announced bankruptcy. 

Silicon Valley Bank (SVB) was the 16th largest bank in the U.S., working with many organizations in the tech industry. However, in response to the Federal Reserve’s continual raising of interest rates since 2021, SVB announced in March 2023 that it had sold securities and treasury stocks and borrowed an additional $15 billion. This announcement caused a run on the bank as its customers withdrew $42 billion. Signature Bank and First Republic Bank have also faced similar financial issues. 

These bank failures have caused waves across U.S. and international markets. The current federal response has been to create the Bank Term Funding Program, which gives one-year emergency loans to credit unions, banks, savings associations, etc. 

Inflation, supply chain disruptions, and market volatility are happening nationwide. For small businesses, it is critical to ensure that all financial choices are informed and stable. If they have a loan with a bank that fails, this can impact loan terms, interest rates, and more. 

As Your Small Business Grows

Whether your small business is relatively new or you’ve been around for a while, there are crucial actions to take as your business grows. 

  • Establish a Line of Credit (LOC) with your banks. Do this even if you don’t anticipate needing it; you want to avoid trying and getting a LOC when you need it if your financials take a downturn. Additionally, ensure you use your LOC occasionally to demonstrate to the bank that it’s active.
  • Build up your cash reserves. Work to set monthly targets for savings, monitor cash flow daily, and eliminate unnecessary spending. These are vital to have ready to go in times of disruption. 
  • Know your alternative funding options. If a disturbance is beyond your control and your small business needs significant help quickly, remember that you could utilize crowdfunding or angel investors. 
  • Diversify your customer base. Consider bringing your business to new markets or targeting different segments. Smart business owners know that multiple, diverse customer bases are key.

Building Relationships

In addition to these steps, you should still build relationships with your loan officers. The tried-and-true method of building relationships is through outside meetings, like getting coffee or lunch. Your relationship with your loan officer is mutually beneficial, so cultivating it is advantageous to both of you.

As you get to know your bank officer, you should ask them questions to understand the bank’s health better. For example, do they have any outstanding loans, and what types? Many commercial building owners have been struggling post-COVID; if the bank has loaned money to these groups, has it adversely affected them? Many sectors have been affected by high-interest rates and inflation recently, so it is essential to get an insight into where the bank stands. 

Engage Your Employees

One of the most valuable assets in any small business is the employees. Employees can offer support as owners build relationships with loan officers and develop intelligent financial strategies. 

If you have an employee on your team who is an accountant or has a financial background, they can be beneficial. Other employees can help by staying updated with economic trends, brainstorming new markets to target, and being ambassadors for the organization. Engaged employees tend to be good for business. 

Resources to Help

Even though this period is rife with bank failures and financial uncertainty, the good news is that we live in the age of readily available information. Check out some of these resources:

BankFind Suite: This FDIC-powered resource offers a variety of search options to comb through their data. You can run financial reports by Institution, check Peer Group Comparisons, and more. 

FFIEC Interagency CRA Rating Search: This FFIEC (Federal Financial Institutions Examination Council) resource serves as a search engine for CRA examination ratings of banks.

Business Loan Calculator: This general calculator tool allows small business owners to calculate the total costs of business loans. 

Connect With The Alexander Group

Now is the time to use these tips to protect your small business and get to know your bankers. At The Alexander Group, we coach business owners on running their businesses in line with their vision and exceeding their goals. Our one-on-one coaching will help you reduce stress by balancing your business and personal lives.

Having a group of individuals with similar goals is also vital. Our group of Greater St. Louis area business owners collaborates, discusses everyday issues, and develops dynamic solutions. When business owners pair this with our one-on-one coaching, they set themselves up for success.

Contact us today if you’re a business owner ready to commit to improvement!