Small Business: How to Shop For a New Bank

In a previous post, I discussed how to find out whether or not your lender has become a stumbling block to your small business obtaining necessary financing by researching the Federal Deposit Insurance Corporation’s (“FDIC“) website.  I would like to develop this thought further by examining the language within an “FDIC” Order to Cease and Desist that should “green-light” your decision to find a new lender.

Most Orders begin with a discussion around a Notice of Charges and of Hearing detailing the unsafe or unsound banking practices and violations of law and/or regulations to have been committed by the bank.  The Order will also indicate whether or not the bank agrees or disagrees with the Order by voluntarily entering into a Stipulation and Consent to the Issuance of an Order to Cease and Desist.

If your bank disagrees, the FDIC may issue a Prompt Corrective Action ordering the bank to raise its capital levels or find a buyer or merger partner.  If your bank consents to the Order without admitting or denying the alleged charges, then the bank must raise its capital levels and cease and desist a list of unsafe banking practices until the FDIC is satisfied all conditions have been met and lifts the Order.

The Order usually addresses the Board of Directors and Management to take affirmative action to:  1.) Raise and maintain capital levels to a specific amount; 2.) Eliminate all assets or portions of assets classified as “loss” or “doubtful” from its books by charge-off or collection; 3.) Reduce “substandard” or “doubtful” classified items; and, 4.) Issue no additional credit to any borrower that has been classified as a “loss”, “substandard” or “doubtful.”

There are many additional items an Order can address to the Bank.  What matters most to any small business trying to obtain or extend a line of credit is how that business has been classified internally by the bank as its customer.  Adverse classifications can put you out of business if no credit is extended or an existing line of credit is called due.  At the very least, “doubtful” classifications can leave you with inadequate capital to grow your business or very unfavorable loan terms.

But here’s the kicker:  what banker is going to discuss this topic with its customers?  As an established business owner, you must do your homework to gather information about your bank.  If lending negotiations are heading in the wrong direction, trust your gut instincts and find a bank that can service your financial needs and help your business succeed.