Be Prepared When Changing Banking Partners

by Ron Overson

Business banking relationships tend to be personal and long-term; they rarely change. However, as your agency grows, its needs change, and you may be faced with the challenge-or opportunity-of finding a new banking partner. When it comes time to face this decision, you should make it in an informed manner. You also need to be prepared with information about your agency that bankers will request to analyze your needs. Be ready to explain your reasons for changing banking relationships, historical financial information, and your expected operating results.

Reasons for changing relationships are diverse. Yours may be related to agency expansion or acquisition, personnel changes in your current bank, or financing needs for capital additions. Regardless of the reason, it's best to inform prospective bankers of why you're changing so they can be aware of how to best meet your current and future needs. Clear communication of needs and expectations early in the relationship will allow prospective bankers to formulate a proposal to fit your circumstances. It can also prevent future misunderstandings and reduce the chances of needing to change bankers again.

Your presentation should include requests for working capital or term loans, plus your needs for checking, savings, and investment services. If electronic or Internet banking is important to you, the ability of a bank to provide such services should be discussed before you make any changes. The strongest banking relationships will encompass all of these services, as well as add a good business advisor to your network.

Be prepared to present and explain the financial history of your agency. Prospective bankers will frequently request up to three years' historical financial statements and income tax returns, in addition to current-year interim financial statements. This information will summarize your agency's financial performance.

You should also be ready to explain annual fluctuations in your revenues and expenses. Customer base, competitive insurance company rates, and changes within your sales staff may all affect your commissions revenue. Changes from agency-bill to direct-bill insurance contracts might affect your level of investment income.

Similarly, your operating expenses could be affected by unique circumstances such as personnel changes, business expansion or transition opportunities, or office relocation costs. In addition, you may need to explain the changing technological needs of insurance agencies and show how the cost of this technology has affected your agency and its borrowing needs. Bankers are good at understanding changes within businesses when they're described well. You have the opportunity to educate prospective bankers on the long-term benefits your agency will realize as a result of recent or anticipated developments.

When analyzing your loan needs and historical financial information, bankers will want to understand your expected future operating results. Project your expected operations for the next three years and provide explanations as to how you will achieve these expectations. Keep in mind that, at this point, the prospective banker has no historical knowledge of your business or your performance toward goals and objectives. Your presentation of this information should be clear and credible.

I recommend using your certified public accountant to help prepare projected financial statements for your agency. CPAs are used to working with bankers in these situations and know how to present projections in a format they understand. Your CPA will also help you project not only your operating results, but your balances sheets and cash flows. Loan proposals and documents should include working capital, tangible net worth, and cash flow requirements. A good set of projected financial statements will help the banker establish appropriate levels for these requirements and may enable you to prevent the potential future costs of having these covenants changed.

When you're ready to request proposals for banking relationships, assemble complete sets of each of the documents just discussed. I recommend collecting them into one binder, complete with an index and tab references. Adding a cover letter summarizing your needs and the information included within the binder will complete your Request for Proposal and will show bankers that you're organized in your business and understand their needs. Providing complete information early on will also save the banker from requesting the data at a later date, and may accelerate the entire process.

Changing your banking relationship shouldn't be taken lightly, and banking services shouldn't be treated like commodities. As you meet with prospective bankers, make sure they know that you value their input and will look to them when making future business decisions. Use your selection process to find a banker who will meet your agency's needs and be a confidante as you investigate future opportunities.