Choosing a bank, or more precisely a banker, is one of the most important decisions that a new or young business can make. A good banking relationship can make the difference between life and death of a business during difficult times. Because the choice of a banker is such an important decision, the new business should shop around before making a choice. The key watchword when choosing a bank should be service. Specifically, some important criteria in choosing a banker should include:

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• Size of the bank – A bank that is too small may be appropriate while your company is small, however, they may not be able to service your needs for larger loans as your business grows.

• Familiarity and desire to work with small business – Some institutions maintain policies that are favorable to working with small business. They tend to be more familiar with special problems of the young and growing companies.

• How the bank will react to your problems – Will they foreclose the first time a payment is late, or will they be willing to give you some extra time to meet your debt schedule?

• Is the bank helpful – Will they go out of their way for you, or are you just another account number?

• Has the bank some special experience in your industry – A bank familiar with your industry is more likely to be tolerant of your problems and familiar with the workings of your company.

• Is there good personal chemistry – Do you feel comfortable with your banker? Do you feel they are responsive to your needs and really care about your business operation? This is probably one of the most important considerations.

 

On virtually every loan, a bank will make reservations or restrictions. Examples of loan restrictions include the following:

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• Restrictions on the level of borrowing

• Minimum working capital levels

• Pledging other assets as loan collateral

• Keeping adequate insurance on people and property

• Maintaining your equipment

• Submission of financial statements and tax return to the lender

 

Failure to comply with any covenant or restriction can put a loan in default and give the lender the right to call on you to pay the balance of the loan. Loan restrictions are often as important as the interest rate. Therefore, you should compare loan restrictions when you have the chance to choose between two different banks. For example, a restriction on the amount that can be borrowed in the future could severely limit the growth of a firm and cause a crunch on cash flow. Before borrowing, the business person must decide which restrictions are acceptable.

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Courtesy of the Small Business and Technology Development Center’s Business Start-up and Resource Guide.