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How to diversify your banking relationships

Imagine that your business had only one customer or may be just one supplier. You’d be keenly aware of the risk of them disappearing. You’d probably be trying very hard to find more customers or seeking out additional suppliers.

Yet many small businesses take a very similar degree of risk by using just one bank. All their cashflow passes through that bank. Their overdraft or their credit line is in that bank’s hands. If they need additional banking services, their starting point is to turn to “their” bank. But this is a significant risk because if, short term, that bank’s systems go down, they can’t operate their account and there have been several such outages recently.

More worrying however, is what typically happens when recession strikes, as it surely will again, or when a bank’s head office changes its credit policy towards small businesses, causing a credit crunch. Then, for the SME, it can pose a real threat to their survival.

Cityscape showing high rise buildings of banks.
Photo by Expect Best from Pexels

Think like the big boys

The history of big bank ambivalence towards small business lending is littered with the remains of businesses on which they pulled the plug. That’s why it’s important to do what the big boys do. The likes of BP, VW or any large multinational business would never leave all their banking eggs in one basket. Indeed, when they look to raise debt through bond issues, make acquisitions or disposals or set up new financial hedging arrangements, they ask a range of banks to pitch for the business and, with their shoes nicely polished and their trousers freshly pressed, the bankers come running.

Of course, a small business doesn’t carry the same commercial clout but the principles are the same – diversifying bank risk and getting the best bang for your banking buck is what it’s about. Here are some steps an SME can take:

  1. Open accounts with at least one other bank to the one you currently use. Regularly put some transactions through it to demonstrate your activity, even if it is just moving funds around.
  2. When you need a service, seek out offerings from rival banking suppliers. For example, it could be a new credit line, company credit card, a vehicle leasing package or a foreign exchange deal related to an overseas sale or purchase. Deliberately seek out a different bank or other provider from the bank you usually use.
  3. Consider non-banking providers. Think Kickstarter, Crowdcube or other crowd funders; one of the new Fintech banks – Monzo, Revolut or Tide; payment services such as Square or i-Zettle for example. I’m not recommending any of these specifically; I’m suggesting doing the research, choosing what suits your circumstances and diversifying away from your usual bank.
  4. Think ahead. Imagine your existing bank did change tack and left you out in the cold; what would you do? Prepare early.
  5. Lastly, get out of the “my bank” mindset. You need to keep in mind that banks do not do loyalty and nor should you. They merely clear your cheques and handle your cash and that is much more important to you than it is to them.

Over reliance on a single banking provider is a risk to your business. It is a risk that may not rear its ugly head until it’s too late for you to do something about it. Fortunately, small businesses now have more choice for banking services than ever before. Diversifying your bank risk can bring greater efficiency, potentially fewer or lower charges, may be less bureaucracy and, above all, lower risk from policy changes or branch closures. Long term, taking the right steps in good time could save a lot of future pain and, possibly, despair.

Two women talking at a table in a coffee shop.
Photo by rawpixel.com from Pexels

That said, there can be advantages from a single bank relationship; it need not be all risk and gloom.

With a little digging, the bank you have been using regularly for some time can get to know your business well. It can see from the transactions on your account what the cash flows into and out of your business look like. This can be a two edged story, but facts can speak for themselves and if you have a healthy business it will be writ clearly in the transactions on your account.

Some of the smaller, private banks make a real effort to get to know their customers. At the extreme end of this, banks such as Coutts or Hoare and Co., have been dealing with some of their clients for decades and in some cases generations. Think landed estates or other multi-generational businesses for example. Relationships can matter in cases such as these, though it has to be said that top business people, celebrities and the wealthy in general usually get the kid glove treatment.

If you do have a good working relationship with a banker at the branch that holds your account, they can help navigate the bank’s bureaucracies and procedures to get things done quicker than normal. Sometimes this can make the difference between taking advantage of a business opportunity or missing out.

So, if you can develop a useful relationship with an individual at your bank, it could be worthwhile. It is at least worth giving it a try.

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