You see it every year at the Chamber of Commerce Expo. Several local banks set up nice tables, with polished representatives, talking about building partnerships with local businesses.
It's all very cordial, with a vibe that takes on an almost "mentor / mentee" feeling – you have goals for your business, and the bank can help you reach them, because they have the funds. But not to treat you like a number, they'll look you in the eye and shake your hand, touting help with that personal touch; "real solutions from real people" was a favorite bank tagline from the last expo we attended.
But behind the smiles and talk about partnership building, there's an ugly truth. It's not simply that it's really all about business (after all, we understand that most businesses - even the bank - exist to make a profit). It's deeper than that. The cold hard truth is this: when it comes to financing equipment, the bank is not your friend.
Keep Customers Coming Back
To fully explain this, we need to first establish the concept that repeat business is important.
For most companies, repeat business is typically accomplished with a combination of different strategies. The most obvious is to offer excellent service so clients come back. If you sell products or services, adding in some kind of buyer's club or frequent buyer's program is usually a good idea. Whether it's frequent flyer miles, hotel points, a member's discount club, or a punch card making your tenth sandwich free, giving someone an incentive to keep using you is good. And assuming your service remains satisfactory, these programs are usually effective.
This does pose a problem for banks, however. They can't really publically offer lower rates for "better" customers, and since money is, at its heart, a concept rather than a tangible product, it's difficult to attach loyalty to it. A bank can offer "better" service, but that boils down to speed and perhaps reduced paperwork, neither which are bank stalwarts.
With Friends Like This…
Thus, a bank will seek to encourage repeat business by force. But they won't tell you this (remember, they want to be your friend). But getting a loan from the bank is akin to befriending someone who expects you to socialize with just them every weekend. It's fine in the beginning, then it starts getting creepy, and eventually downright oppressive.
Let's assume you are buying a piece of equipment. To make this industry-neutral, it's a widget (a big one). You go to your "friends" at the bank to finance the equipment. They will happily lend you the money. In a few days, they'll have a contract that you sign, and then a check arrives. However, within that contract are the following covenants (note, these are common in almost all bank loans).
• A Blanket Lien – This is a clause in almost every bank loan contract that gives the bank ownership (via a lien) over everything in your business. While it's common for a lender to put a lien on the equipment you are buying as collateral, putting a lien on everything else seems a bit (ok, a LOT) much. So if you buy the widget and next year you want to trade in a truck, guess what? You can't without the bank giving you the ok. Even if the truck in question has nothing to do with the bank, the widget, or anything else. This goes for every piece of equipment in your business, and could really cripple your plans later on down the road.
• Minimum Account Balances In Said Bank – The bank will want you to have an account with them. Preferably several, of course, but they will almost certainly insist on at least one, and most common loan contracts will stipulate that said account needs to always have a balance equal to 80% of the loan amount. Now think about this logically for a moment – if you are required to keep 80% of the loan in the bank, whose money are you really borrowing? Aren't you borrowing 80% of the loan from… yourself?
• Requalifying Every Year – The bank will require the loan to be requalified every year. This means that if you have a bad quarter, and the financials don't look as rosy as they once did, they will have the right to call in the entire loan (so that's why they want that 80% in their vault). The preceding can happen even if you've had a perfect repayment history.
These restrictions serve two purposes. On the surface, they greatly lessen the bank's risk, but also, more subtly, they keep you in the fold. Once you are entrenched with a bank, it can be difficult to leave. This is how the bank encourages repeat business – they make it hard to go anywhere else.
What Will The Bank Say About This, And Is It True?
If you took this article to the Chamber expo, the bankers would comment with the following:
"That article was written by an equipment financing company, who is our competition. Sure, we might have a few more restrictions, but they reduce our risk, which allows us to give you better rates. Rate is everything, right?"
That might matter if the difference in rates were at Credit Card or "Rent to Own" levels. But they are not. To give you an example, if the bank offered 4% on an equipment loan, a good equipment financing company would probably offer 5-7%. That's not a very large difference.
But the caveat is in the restrictions. A good equipment financing company will have NONE of those restrictions. As in zero. The rest of your assets are yours, the equipment financing company won't care about your bank balances, and assuming you repay on time, will also never bug you. You have complete freedom and flexibility with both your money and your operations.
Which Way Is Better?
It is true the bank will offer a slightly lower rate, but then will make sure they have a say in everything you do for the foreseeable future.
An equipment financing company will have a slightly higher rate, but are decidedly hands off afterwards. In an unscientific poll, a great majority of businesspeople we talked to prefer the zero restrictions, as long as they felt the rate was reasonable. After all, most business owners are entrepreneurs at heart, and march to the beat of their own drum.
In the end, when it comes to business, the best friends are the ones who let you do things your way.
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