By Jeffrey M. Schlossberg, Esquire
Many clients come to us and tell us that they are switching banks or lenders because their new lender is offering a rate one-half (1/2) point lower than their existing mortgage or debt package. While we do not disagree that this can represent a significant savings over the life of a mortgage or loan, we think the business owner needs to make further analysis before the decision is made to switch lenders. Conversely, you may have chosen not to refinance because you thought you were getting the best deal.
With a mortgage or other financing, you have to consider: all fees being charged and not just the rate; points to be paid to the bank; closing costs; legal fees; inspection costs; appraisal fees; environmental analysis fees; title insurance; zoning opinions; selling the note to the SBA; and SBA compliance issues. You should also understand how prepayment fees are to be calculated in a fixed rate loan situation. You may also need to face the issue of a fixed versus floating rate. If it is a floating rate, does it have a floor or a ceiling? How will it be recalculated? How frequently? Are there charges for renewal of a fixed or floating loan? When does the business credit become re-evaluated? Will your banker notify you automatically if their lending rates drop? The list is different for each customer, but the rule for clients is to get educated. All of these terms should be in writing in the form of a commitment letter from the bank.
However, there is more to a banking relationship than just the rate being charged. First of all, the banker is part of your management team and should understand your business. Not all bankers are alike. Just like anything else, there are some lenders who are more astute than others. You need to have your banker on the same page as you as your business increases or shrinks. At the first sign of trouble, you do not want your banker to pass you off to the workout group at the bank. You want your banker to hang in there, and help you work through the crisis. The banker needs to understand your business cycles. He needs to help you through these periods when your borrowing needs might be more acute. He needs to know when borrowing on a line of credit should become a fixed term loan because you are financing equipment. Financial ratios, which are both achievable and clearly understood as to the definitions, must exist in your business. Where are the bank branches located? Will the bank personnel make it easy to work with your staff? The banker needs to be able to suggest leasing as an alternative when he sees your balance sheet becoming crowded with too much debt.
Your banker should introduce you to other loan programs or governmental assistance programs that might be available, such as TIF (tax increment financing) or tax exempt bonds. Will the bank subordinate some of their secured position in order to facilitate additional capital to your business or other type of debt in your business? We have seen banks block intrusion of senior debt because the bank does not want to dilute its secured position. How long has that loan officer been at the bank, or is the bank a candidate for a new regime via a future takeover? This is a relationship-driven world, but you do not want to constantly be spending time following your banker from institution to institution. It is too time consuming and too expensive.
In addition to the above, you have to look at the fees which your bank may charge after you borrow the money, and not just at the rate of interest. For example, some banks charge monthly maintenance fees and some may charge a fee for line of credit availability even if it is not used. There are check processing fees, letter of credit fees, credit card processing fees, overdraft fees, and insufficient funds fees (NSF). How does the bank process NSFs? Do the smallest checks clear first? Are deposits cleared before checks are issued? How does the bank handle foreign checks that are deposited, and is there a related fee? How long before the deposits are credited to your account? How are payments to foreign vendors handled? Are there wiring fees? Who is their foreign corresponding bank?
You also need to look at the income on excess cash in the business. Does the bank offer sweep services whereby excess business funds are deposited in higher rate accounts than business checking? What interest rate does the bank offer on sweep accounts? How often is the interest posted or the rate on the sweep changed?
Finally, we are now living in the age of the internet, and internet banking will continue to become more prevalent. Some local banks are offering not only internet checking, but scanned deposits as well. The list will go on as our society becomes more connected. The recent case involving TJX may indicate a new line of liability begging the question "how secure is your bank information?" What steps is the bank taking to protect your information stored at the bank? Does the bank indemnify you if there is a breach of security at the bank and the credit card information for your customers is stolen? New legal theories are emerging, and your bank needs to take a proactive stance.
As you can see, it is too easy for the business owner to make a decision based solely on rate. The business owner has more "homework" to do in understanding these issues. He must understand the total package being offered by the lender, and make a final decision based on all the factors. Look before you leap!!!!