When Bill Sullivan decided to improve his banking relationships, he engaged in addition by subtraction. The finance chief of ProLogis, a Denver-based real estate investment trust, had an army of banks — 41, to be exact — participating in the company’s $3.6 billion line of credit. As banks are wont to do, many clamored for a helping of the firm’s debt and equity underwriting deals. Sullivan couldn’t satisfy them all, so in the summer of 2009 he cut the number of banks to 19, while shrinking the revolver. Each credit provider now gets a bigger slice of ProLogis’s banking spend. More important, Sullivan gets something in return: “Once I whittled it down, I ended up with a core group of banks that are tremendously responsive.”
Most CFOs want their banks to be responsive, but few are feeling the love as banks slowly emerge from two years of their own hell. In a new CFO survey, almost 25% (of 640-plus respondents) describe their relationship with their primary bank as “strictly transactional” — that is, their bank is interested in them only as a source of revenue. Another 20% classify it as “deteriorating” or “abysmal.”
A substantial number plan to respond accordingly. Between now and the middle of next year, more companies — 19% of midsize businesses and 16% of small businesses, according to Greenwich Associates — will issue requests for proposals, a key step in switching to new banks. (Historically, only about 10% of firms switch banks in any given year.) As motivation, CFOs are most commonly citing dissatisfaction with customer service and a desire to reduce banking fees.
Other CFOs, however, don’t want to upset the apple cart. After all, while commercial and industrial lending has fallen for six straight quarters, companies still rely heavily on banks for funding. Any move that weakens connections with credit providers, especially those that command large market shares, is dangerous in this economy. What’s more, switching banks means moving “sticky” services like cash management, an expensive proposition.
So what’s the alternative? Go the other way, according to many experts. Cement ties to your banks, work to stand out among the herd of clients, and figure out why your company should matter to them. And in a pinch, don’t hesitate to play banks off one another. Those actions may give your company a leg up when it comes time to refinance.
By following some of the guidelines detailed below, a CFO stands a good chance of regaining the upper hand. At the very least the company will have a much better handle on whether it is currently doing business with the right financial partner.
The first step in bolstering a company’s credibility with its bank(s), according to Craig Orchant and Reuben Daniels of EA Markets, a capital-markets and banking-advisory firm, is to perform a very basic analysis that quantifies the company’s total banking spend and its different components. CFOs need to understand three costs in particular: hard fees (investment-banking fees that are disclosed and easy to calculate), “soft” fees (undisclosed, such as the spread a bank earns on an interest-rate swap), and “shadow” fees (noneconomic fees that enhance a franchise in a particular business line or league table).