Banking

Hi there

Every wondered how the banks get around to getting new business from businesses and what they are actually thinking about? It works a bit like this....


i) The bank approaches a company or sometimes the company approaches the bank, or is referred to the bank. If the bank approaches the company, all is good. If the company approaches the bank, however, the bank becomes intensely suspicious - the main question is, WHY is the company approaching OUR bank? Is sometimes wrong? Why aren't they approaches other banks? So, even at step 1, there is a conflict, if nobody approaches the bank, there is no business. If somebody approaches the bank, they could be out to pull a fast one over the bank.

The trick is getting the bank to approach you, instead of you approaching the bank. Get somebody to recommend your name to the bank so that the bank will call you.


ii) Everybody gets together, sits down and talks shop. Yadda yadda yadda;

Customer says "This is what I need and want from the bank."

"Oh really? What are you getting from OTHER banks? What security are you giving to OTHER banks?" says the bank. Notice, the bank is more concerned with the concept of pari passu instead of how they could be helping the customer.

(Pari Passu is the bank simply saying this - what other banks are getting out of you, I must be getting it too. If you are giving other banks a USD 1 million fixed deposit, come heaven or hell, you must give me a USD 1 million fixed deposit as well. The motivation is that the bank cannot be 'worse off' compared to other banks.)

While the bank should actually be more concerned about how they can provide their facilities, and how they could actually help their customer better, they are more pre-occupied with what other banks are getting. I am tempted to believe that the secret motto of the bank is

"We will only help you as much as the other banks are helping you."
"p/s But we are happy to charge you more."

Banks are there to make money BY lending you money. If you don't borrow money, they don't make money, feel free to ask for what you really need instead of letting the bank dictate what they are willing to lend you.


iii) So let's say, everything goes well. The bank decides to work with the customer, the customer decides he'll take what the bank offers. The bank then moves on to the next stage - determining what should be given to the customer. This is hugely dependent on what kind of collateral the customer is putting up front. While of course, in theory, you should use certain calculations and ratios, based on the cashflow, profit and loss etc, but that all goes out and in comes, Collateral!

The concept of collateral is a big pain, while yes, companies often have to give collateral to secure their facilities against, the extent to which the bank pursues getting security is sometimes disgusting. While the main intent of collateral is to have something that the bank can liquidate to cut its losses, sometimes it appears that the bank doesn't think very much. For example, a $150 million dollar company is not going to default on a $500,000 facility, simply because the company has more to lose by defaulting and closing shop. But the bank is unlikely to see it this way and will go all out to get its rightful collateral.

Top Rules of collateral (from the bank's view)

1. The most valuable the property (I will used property as the most common security) is,the better,

2. The more personal the property (the director's house, the company's main office), the better,

3. Don't forget pari passu, I don't care what other banks are getting, I must get the same deal, or better (usually or better),

4. If you are not giving me a Joint and Several Guarantee (personal) from the directors, you could be out to cheat me. If you give me a Joint and Several Guarantee from the directors, the moment something goes wrong, I am going to take all your directors to hell and back.

But, regardless of hot much emphasis is given to the Joint and Several Guarantee, it is NOT an actual security, because it has no tangible value. You should see the big fuss that gets kicked up when you combine the Joint and Several Guarantee with the pari passu approach.

"What?! Those !@#$ are not giving US the Joint and Several Guarantee?! We must get it is all off...." of course, if nobody gets the Joint and Several Guarantee, then the banks have a different mentality.... "What?! Those !@#! are not giving ANYBODY the Joint and Several Guarantee?! Who do they think they are?"

Do not be scared when the bank demands collateral. If you are up for it, ask them what they want and halve anything they say. If you are a large company, even better, tell them to bugger off. If you can prove that you have more to lose by defaulting and closing shop, you have the upper hand.

iv) Everything gets sorted out, and the bank sits down and thinks, how much should I charge the customer? Like all good businesses, the bank will levy the highest charge possible for the least amount of services provided (it is a profit-making business) BUT, if the customer (like all other good businesses) tries to request for lower rates, lower charges (the customer is trying to make a profit as well), the bank will see the customer as being an ungrateful ingrate who is out to short change the bank.

No matter what your bank charges you, chances are it is negotiable and can be lowered, especially when it says "fee".


v) Some of the fun comes AFTER the deal has been agreed, signed and given out. Say there's a customer, currently with Bank ABC. Bank XYZ comes along, says, "Hey, we can offer you 2% cheaper then what you're getting now." So the customer, being profit oriented, goes over to Bank XYZ. But then on top of giving the customer the 2% cheaper rates, Bank XYZ will also say, if you want our 2% cheaper rates, you must sign a 5-year bond with us! And proceeds to celebrate when the customer agrees.

Of course, if Bank QWE comes along and poaches Bank XYZ's customer, the customer is an ungrateful bugger who wouldn't be alive if not for Bank XYZ. And Bank QWE is a no-good customer stealing bank.....

The bank will always try and lock you in for an extended period. Do not be fooled, do not agree with this at all if you can help it.


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What a long post, well, actually there are more things to be said, but I don't have enough time. I will get round to editing this and adding in more stuff! :)

Should add this disclaimer that this is what I see at my bank, I am not sure what happens at YOUR bank :P