Multiple Banks Equal New Opportunities for Mid-Sized Companies

By Celano, Edward A. | The CPA Journal, February 1999 | Go to article overview

Multiple Banks Equal New Opportunities for Mid-Sized Companies


Celano, Edward A., The CPA Journal


Before the current acquisition and merger frenzy, many middle-market companies were content to do all their banking with one bank. They were comfortable and had relationships with someone who understood their business. But ongoing consolidation in the banking industry has transformed many of those relationships into relatively fragile, transaction-driven arrangements. Such relationships can be adversely affected by a number of factors outside of the customer's control, including frequent changes in personnel, changes in lending policies and risk tolerance, public market pressures, and cost cutting. As a result, many mid-size companies, even after a 20-year relationship with their bank, suddenly discover that their business no longer fits the bank's portfolio. This often happens even when the company's fundamental business and financial profile haven't changed. A two-bank arrangement is a common way to prepare for this eventuality and make certain that, even if one bank changes unexpectedly, a second bank will continue to provide financing and offer both tangible and intangible advantages over a single banking arrangement.

Utilizing two banks also avoids the problem of outgrowing one bank whose lending limits can no longer meet your needs. That's why companies should not only consider legal lending limits but, more importantly, lower ceilings. These include internally declared house lending limits and less formally declared comfort levels as they may apply to a particular business owner. Maintaining relationships with more than one bank addresses this issue in two respects. It creates a resource that can lend more dollars to the company, and it facilitates a smoother transition in case one bank decides to either reduce its exposure or cease providing credit entirely.

Cost Advantages

Maintaining multiple banking relationships can yield substantial cost advantages as well, since competition encourages better pricing and focuses the banks' attention on customer service. When two or more banks finance and service the same company, the competitive situation forces bank managers to price their credit and noncredit products more attractively. The competition also encourages the banks to distinguish themselves by offering more products and services. While companies generally view multiple banking relationships primarily as financing tools, they should also look for banks with competitive advantages in noncredit areas. Areas such as trade finance, cash management, fiduciary services, private banking, interest rate risk management, and investing and advisory services vary in quality and sophistication at different banks. …

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