Is It Time to Switch Banks?

Dale Smith was getting frustrated. The co-founder and CEO of the $5.5 million Industrial Painting in Brighton, Tenn., had been in business for 24 years, painting refineries, factories, and other industrial sites. For all those years InSouth, in Brownsville, Tenn., had been his bank. But in October 2008, citing a decline in the value of real estate used to secure his line of credit, InSouth nipped the 88-person company's line of credit to $762,000 from $779,000. And the line would now come up for renewal every six months instead of annually. "That not only hurt our feelings," says Smith, but with an additional $500,000 line of credit at nearby First State Bank, "We were spending a lot of time sending financial statements and other information to the bank."

So in May, Smith went shopping for a new lender. That process ended happily just a month later, when Smith gave all his business to Millington (Tenn.)-based Patriot Bank. He now has a single $1.3 million line of credit. Even better, it doesn't need to be renewed for five years. That meant Smith didn't have to worry about refinancing quickly when he used the line to buy $200,000 worth of trucks and trailers this summer. "This gives us a lot of flexibility," he says. Rates on his old lines of credit theoretically could have soared past 20%, but the new one tops out at 7.75%.

Smith isn't the only one fed up with his bank. According to an October 2009 survey by Stamford (Conn.) researcher Greenwich Associates, the share of small businesses actively looking for a new bank has nearly tripled since December of 2008, jumping to 17% from 6%.

For Smith, the first step was deciding what, exactly, defined a better bank. First, he wanted a personal relationship with a small-town bank, which he believed was critical to getting good service and protecting him from unfair, arbitrary credit decisions. Second, he wanted a line of credit that was locked in for a year or more, and he wanted a decent rate and ceiling. "I think if my bank gets a floor on the rate, then I should also get a ceiling," Smith says. And he wanted a lender with solid financials rather than one struggling with its own capital position.

CANDOR HELPSSmith decided to audition three banks: InSouth and First State, where he already had lines of credit, and Patriot Bank, which had approached him about business banking in the past. All were local. After studying government filings, Smith determined that all three also had good capital positions.

InSouth was willing to renew for a year, but that was it. So in May, Smith sent a letter to First State and Patriot outlining his needs. He had also sent all three banks a letter explaining that although Industrial Painting had generated positive cash flow in 2008, the company showed a loss because Smith had amortized expenses on new equipment and spent money on training. He argued the company would see a payoff by the end of 2009. Jan Phillips, associate vice-president at Patriot Bank, says Smith's candor helped. "He had everything prepared, and he explained in detail what had happened," says Phillips. "Sometimes it can be hard to get that out of people."

Smith liked the offers he got from Patriot and First State. He set up face-to-face meetings and let each bank know he'd be sharing their bids with the other. Patriot's offer appeared to be the best, but Smith wanted to clarify how the rate on the line would change and what the maximum would be. He also had the bank spell out fees on other services, such as direct deposit, payroll, and bill-paying. In the end, the fees at both banks were comparable, but the line of credit from Patriot had the longest term and came with a relatively low rate ceiling. Smith signed on in June. In addition to the financial benefits, he got the personal relationship he wanted. "I can pick up the phone and have an answer in three seconds," he says, "instead of waiting for an answer from someone who doesn't even know me."

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