Most petroleum companies are in the driver’s seat when it comes to banking. In fact, you may not even realize the clout you really have! Try flexing a little muscle through these strategic moves that will lower your cost of business:
1) Request daily automatic pay down of any working capital lines. Anytime there is spare cash in your checking account at the end of the day, it should be used to pay down your line of credit to save interest. Most banks can do this function automatically through computer wizardry. If your bank is not this sophisticated, ask your loan officer to help you out by having a clerical person do this for you daily.
2) Consolidate loans – Now is a great time to bundle all your small notes payable into one, low-cost loan. By borrowing a larger amount of money in one chunk, you save the bank administrative costs. Therefore, you can usually lower your interest rate by one-half point when you consolidate your debts this way.
3) Ask for LIBOR-based loan pricing. This is a less commonly known loan pricing benchmark based upon the London interbank rate. As of this writing, LIBOR was about 5.5%. Loans are typically quoted based upon 30, 60 or 90-day LIBOR rates and can be tracked through the Wall Street Journal.
LIBOR pricing allows a bank to quote rates that are significantly under the prime rate. You will rarely see a bank quote at “Prime minus X%” but you will see them quote at “LIBOR plus.” Since prime is typically defined by banks as the rate they give their best customers, it’s difficult to quote rates under that benchmark. Instead, they save face by quoting to a different benchmark, such as LIBOR, to achieve sub-prime rates.
4) Request “custom” checking account fees. Most banks charge fees on various checking account transactions such as deposits, wires, cash, checks, etc. Since your company is likely a very large deposit customer for the bank based upon the sheer amount of revenue you flow through your account monthly, request custom pricing on your checking account fees. When negotiating, you can safely assume your bank has at least 100% profit built into those fees.
5) Keep your eggs in one basket but an ace in the hole. By keeping most of your loans and deposits at one institution —not spreading your business around — you usually get the best rates. Loyalty counts, but remember to keep a second institution knocking at your door, ideally waiting breathlessly for your business!
Because of general historical fickleness of the banking industry towards the petroleum industry, you always want a suitor waiting in the wings in case your bank decides they are not keen on petroleum this year.
6) Bid out your banking needs every three years. Even though loyalty pays, blind loyalty is foolish! To keep your bank on the straight and narrow and make sure you are getting a great deal, go out to bid every three years.
7) With working capital lines of one million dollars or more, request 364-day commitments. Banks have a lower internal cost of funds for commitments shorter than one year than for those one year or more. Changing your line maturity date to expire 364 days from the note origination date will usually save you one-quarter point.
8) Eliminate multiple checking accounts. Most companies have extra checking accounts simply for accounting purposes. By using unique deposit locators within one master checking account, you eliminate the need for multiple accounts. Ask your banker about deposit locators.
9) Use master lease lines. Particularly for rolling stock and c-store equipment, master lease lines are cheap, easy and convenient. Your bank commits to a aggregate dollar maximum of leases and rates up front. With this pre-approval, you simply fax the bank the details on your potential lease, and within hours are ready to complete your transaction.
In summary, most petroleum companies are reasonably big business for a bank. We run large dollar operations that are capital intensive with both term loan and working capital needs. With this in mind, don’t shy away from using a little savvy and clout to negotiate a better banking deal for your company this year.