Six things to consider before you tender your banking business

Over a drink at the 19th hole at their golf course, Rob was telling Joe how Joe’s bank had offered him an exceptional deal to switch banks.

Joe’s blood pressure immediately rose because he felt more deserving, and it infuriated him that he had been a loyal customer of this bank for over 15 years and now Johnny-come-lately like Rob was getting a better deal. Joe’s immediate reaction was, “I’m going to tender my banking business!”

Whilst this is perfectly understandable, before embarking on this course of action Joe would be wise to consider the following six questions:

1. What do you really want to achieve?

Do you really want to change banks or just find out if you are getting a fair deal? If it’s the former, then a tender may well be the best approach. A formal bank tender is a process where selected lenders are invited to submit proposals based on a comprehensive package of information.

If you just want to make sure you are getting a fair deal, there are quicker and cheaper ways of doing this. For instance, pose a question like “we’ve been loyal customers for a long time but I’ve heard of better deals being done for lesser customers, would you please have a look at our file and tell me we are getting the best possible deal?”

2. How attractive a customer are we?

Before going to tender, you should do the numbers to see how attractive you might be to another bank. It may be that you’re already on a good wicket. Going back to your bank, cap in hand, after finding no other bank will take you on puts you in a precarious bargaining position.

3. What are the downsides in running a tender?

Tendering can be expensive and time consuming. If you are going down this path, ensure you have all the information in a format that makes it easy for the banks to accurately evaluate your proposition. At a minimum, this means a business plan, results for the past three years and projections for at least the next year.

4. How do we evaluate tenders?

If you thoroughly conduct the process of obtaining proposals, you need to be sure you can then meaningfully evaluate them. There is a raft of confusing bank terminology particularly around fees. Ask as many questions as necessary to ensure you’re comparing apples with apples.

Remember price is but one factor. Arguably more important is the “fit”, meaning how well the bank understands you, your business and industry. For instance, in the current, uncertain environment, having headroom in your overdraft limit or a loan-to-value ratio covenant could be worth much more than the saving of 0.10% p.a. on your interest margin. 

5. When is the best time to conduct a tender?

Business owners usually make a decision tender as a result of an event. It could be the rejection of a loan application or having your pricing increased, but the best time to look around is when you don’t have an immediate issue. This way you can focus on the big picture rather than being worried about a short-term outcome.

6. Am I acting with my head or my heart?

It’s never a good idea to allow your heart to lead you in making decisions on your banking relationship. Don’t say or do anything you may later regret. Take your time and be guided by your head not your heart.

Summary

• Quality long-term customers can be overlooked by banks;
• If you think you deserve a better deal, do something about it, don’t expect the bank to come to you;
• But do your homework first. Understand how much fire power you actually have;
• Ensure you evaluate tender proposals on an apples-with-apples basis;
• Tender when you don’t have an immediate need; and
• Use logic not emotion.

For further reading, see “Romancing your bank manager”

Neil Slonim is a banking adviser and founder of theBankDoctor the world’s only specialist source of truly independent and free banking advice for SMEs.