Choosing a bank for your small business
Question: Good day, I am about to start my business. Which bank do you recommend?
- H. Dawkins
Businesswise: Frankly, there's no bank that stands out to me as 'the best' entity for start-ups and small businesses. In fact, you should start by 'thinking outside the bank' and consider all financial institutions that offer services to businesses, their interest rates, fees/charges, branch network, collateral requirements, accessibility, customer service, attitude towards and support for micro-, small- and medium-sized enterprises (MSMEs).
I must caution that when starting a business, taking a loan or using debt financing is not the best option for many businesses as high interest rates can burden the business when it is most vulnerable, which can strain the cash flow it needs to survive. Of course, this isn't the same for all businesses, but it is a point worth considering. With that said, it is good to start building a relationship with a financial institution very early, not just for the operation of a business account, but to open the door for accessing financing when the firm needs it and can repay.
Before you can select a financial partner, you need to be clear on your financial goals and business growth needs. Then do your evaluation based on the entity that can best meet your specific needs now and in the future. Don't focus on their promotions, pronouncements and advertisements, but rather their actions, the make-up of their loan portfolio and reputation - a point I will return to shortly.
I know the common practice is for entrepreneurs to head to a commercial bank and open a business account to facilitate transactions without giving any thought to their financial goals and plans, but that's a naive approach. It can stunt or kill your business. Remember that where you lodge and keep most of your money matters.
In my entrepreneurship training workshops, I always warn against building a relationship with an institution that will not fulfill the needs of your business as it develops. Many MSMEs have done business exclusively with one bank for an extended period, only to find that when they need financing, the relationship they've built has no currency, as the bank is more interested in lending for personal expenditure on cars, appliances, vacations, etc., than for productive activity.
Using Data to Plan and Guide Decision-Making
Returning to my point about examining the loan portfolios and lending practices of banks and other financial institutions: I have bad news - banks and other lenders generally don't find start-ups to be an attractive target group and are still not meeting the financial needs of most MSMEs.
The most recent research commissioned by the Inter-American Development Bank on access to finance for businesses concluded that Jamaica is currently suffering from market failure as the financial sector is providing very little financing and at a high cost, and that the productive sector (SMEs) is starved of cash. In 2013, Jamaica's lending rates were more than double that of Barbados and Trinidad & Tobago. The value of the collateral needed to secure a loan as a percentage of the loan also greatly exceeded that of our major Caribbean trading partners, putting local companies at a competitive disadvantage.
The Bank of Jamaica produces a quarterly report titled Quarterly Credit Conditions Survey Report, which outlines changes in the demand and supply of credit to businesses and individuals and reasons for same, among other insightful data.
The March 2015 report noted, "Lenders continue to report that the economic environment and the pace of depreciation of the exchange rate have affected their ability to respond to credit requests." In other words, they aren't meeting the existing demand.
Additionally, of all the credit provided to the private sector, only 40 per cent was to businesses, 60 per cent was for personal loans. What's much worse is that, of the total amount of credit extended to businesses, 70 per cent was for large companies, 19 per cent to medium-sized companies and 11 per cent to small businesses.
When compared to the corresponding period last year, the credit offered to small businesses has declined by 50 per cent. This is alarming when you consider that the country's growth prospects rely heavily on the expansion and robust development of the productive sector, specifically productive MSMEs. Try to factor this information into your business and financial planning as it will affect if and how you can expand your business, and even your target customers, if they are local MSMEs.
Although commercial banks are strengthening SME units and promoting small business loan products, the data shows that financing your business will be a major uphill battle, and that big financial institutions with the lion's share of the country's savings prefer lending to large, mature businesses.
Fortunately, there are scores of entities other than traditional banks currently servicing the sector and many initiatives are underway to improve access to financing for MSMEs. In the meantime, you can advance your research and evaluations by visiting the MSME Financing Directory at http://www.findmsmefinancing.com.jm. There, you will find a list of 63 companies that provide loan financing, sic that provide grant funding, and one venture capital firm, among others.
n Yaneek Page is an entrepreneur and trainer in entrepreneurship and workforce innovation. She's also the creator and executive producer of The Innovators TV series. Email: email@example.com Twitter:@yaneekpage, Website: www.yaneekpage.com