After three years of tending to internal problems - bad real estate loans, reorganizations, mergers, and renewed scrutiny from regulators - bankers say they are returning to the business of making loans. Some, like Bank of Boston, have announced multibillion-dollar programs.

The timing certainly seems right for the banks. The economy continues to show signs of improvement. The federal government has relaxed reserve requirements and other restrictions.

The shakeout in banking has left the strongest banks with less competition. Now that the banking system is stabilizing, in the eyes of the public, more money is likely to move into business lending.

A Profitable Approach

Perhaps most important, the profits on business loans are potentially enormous. That's because the spread between the interest rates on deposits and on loans is large by historical standards. Banks are also lending at larger percentages over prime than usual - 1.5% to 2% versus 1% to 1.5% typically.

But what's good for the goose isn't always good for the gander. Just because banks stand to benefit from expanding business loans, that doesn't mean that small and midsize companies should suddenly switch banks or seek out new credit lines. Many such companies ran into trouble when banks called good loans to cover and bad ones.

It's a given that banks carefully analyze all companies they are considering for loans. In today's climate, it is equally important for company executives to know about their bank's financial health.

Has the bank done all the reorganizing it's going to do for the next year or two? What is its track record in sticking with loan customers over the long term? Perhaps most important, does it work with companies in your industry or related industries? A company is in the market not only for a loan, but for knowledge and advice as well.

Promotional literature and sales calls from banks may tempt a company to make a change, but it is important for executives to keep in mind that the banking industry isn't yet completely stabilized. There are still lots of bad loans to be dealt with and reorganizations to be completed.

This means that the nightmares of the last few years, like the calling of loans to solid companies, aren't necessarily over. In one recent situation, a small company took the sales bait and switched to another bank, only to have its new loan called three months later when the bank went through yet another reorganization.

Executives should seek commitments -- in writing -- that as long as the company keeps its side of any agreement, loans won't be arbitrarily called or credit lines canceled. And they must make sure that the loan administration people they will be dealing with are as understanding as the sales people who solicit business.

Seek more than the lowest interest rates. The benefit of lower interest rates has a way of being eaten away at by other costs. The difference in annual cost

for one $5 million credit line at 1% over prime and another at 2% over prime is $50,000. Transaction, legal, and accounting fees can easily eat up that first-year savings, and then some.

Moreover, banks increasingly compensate for reduced interest rates by hiking the fees they tack onto routine transactions such as making deposits and accessing credit lines.

A better reason for a company to change banks is that one bank can better serve its needs than the other. For instance, a company's present bank may be unable to conveniently provide such newly necessary services as letters of credit, money management, and foreign-exchange tools.

Checking the Provisions

Or key loan provisions affecting a company's operations may be more favorable at one bank than another. One midsize company decided wisely to change banks when a new bank allowed the company to borrow 80% on its receivables, versus the 60% allowed by its previous bank. The additional credit enabled the company to quickly exploit a new market opportunity.

The huge changes in financial services have clearly changed the one-straightforward protocol of obtaining bank financing. Executives of small and midsize companies must take more responsibility for their own fate.

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