From the October 1999 issue of Entrepreneur

Entrepreneurs are all about growth. They want to grow their sales, market share, customer base, profits and more. But if their support system--their accountants, lawyers and, most important, their banks--are inadequate, growth can stagnate.

When it comes to banks, what's the best approach? Should you stick with just one for all your financial needs, or maintain multiple banking relationships--possibly using the small community bank you started with for the basics, and a bigger institution for larger loans and more sophisticated services?

According to preliminary results from a study sponsored by the Arthur M. Blank Center for Entrepreneurship at Babson College in Wellesley, Massachusetts, entrepreneurs tend to have relationships with several banks as they grow. "Sometimes these relationships are simultaneous, but often they're sequential," explains Julian Lange, a professor at Babson College and a co-author of the study with Jonathan Levie and Jan Warhuus. Lange advocates maintaining simultaneous banking relationships to stimulate competition. He also points out that using more than one bank can provide you with some insurance in case one of your banks merges or is acquired, or if your loan officer leaves for greener pastures.

Of course, bankers see it a little differently. "I don't want to have my best customers dealing with another bank, and every time they want something, they go to both of us to see who will give them the best rate," says Robert Fazzini, president of the commercial loan office of Busey Bank, a $991 million institution in Bloomington, Illinois.

Not your concern, you may think. But remember, if you're not careful, you could be left in the lurch by all the banks you deal with. "Entrepreneurs have to realize that banks profit on the services they sell you, and that's why they work with smaller firms--in anticipation of those businesses growing and needing more services. If they perceive they won't get more business from you, banks could lose interest," cautions Lange.

You might be able to circumvent this obstacle by using two banks simultaneously for different services. But realize that keeping two or more bankers happy and interested may require an investment of time you didn't bargain for.

Focus-Pocus

With niche banks, the magic is in the hands-on relationship.

Feel like just a number at your bank? You might want to take some of your business to a niche bank.

"As a niche bank, we have fewer customers, but they're all well-known to us," says Jay Fritz, CEO and chairman of Royal American Bank in Inverness, Illinois, which focuses on family-owned manufacturing firms in the wholesale and service industries. Also, because niche bankers know the particular industries they serve well, they're more comfortable riding out a firm's inevitable economic dips, points out Fritz.

Niche banks typically don't mass-advertise. Instead, they connect with trade associations, advertise in industry publications and rely on customer referrals, says Fritz. He offers these tips for looking for a niche bank:

  • Evaluate the bankers' experience. Officers should be business bankers with at least three to five years experience.
  • Check loan turnaround times. "If [a niche bank has] a stable office staff, they've taken time to get to know customers and their businesses and should respond quickly," he says.

If there's a downside to choosing a niche bank, it's size. They tend to be smaller and local or regional, which means customers could outgrow the bank.

And if you think the rash of mergers and acquisitions have rendered niche banks an endangered species, think again. Fritz believes as larger banks get more efficient at serving broad-based markets, this will clear a path for tightly focused smaller institutions that can spend more time on customers than on bank-buying.

Contact Sources

Busey Bank, (309) 663-7372, rfazzini@busey.com

Royal American Bank, (847) 202-8300, http://www.royalamerican.com