If your current bank doesn’t understand
your business, it may be time to find a new
financial partner. In today’s challenging
economic climate, it’s crucial that your bank
is familiar with your market and understands
the need for prudent long-term investments.
“When the customer and its bank are
aligned on the fundamental questions, it’s
possible to structure a banking solution that
carries the business through tough times,”
says Edmund Ozorio, senior vice president of
Comerica Bank’s Western Market.
Smart Business spoke with Ozorio about
selecting a bank in uncertain times, the
importance of finding a good fit and how to
go about evaluating a financial institution.
Why is the selection of a banking partner so
important today?
It’s really a question of fit: How well does
your bank fit your company and your banking needs? This fit has always been important, but in today’s environment, it’s doubly
so. With the current stress on the economy,
there may be stress on your company, on
your industry and on your bank, as well.
Because in times of stress, people and companies fall back on their basic values and
philosophies, a bad fit is quickly exposed in
uncertain times and can easily lead to difficulties in your banking relationship.
What do you mean by a good fit?
A good fit is where a bank’s core market
and philosophy match those of its customer.
A bank needs to understand your market,
current business, specific business environment, your goals and your tolerance for risk.
Your bank needs to be certain that its lending
and credit philosophy can support your business and plan through not only likely deviations from the plan, but also unexpected setbacks. A good fit is when expectations are
aligned before problems occur.
For example, a bank experienced in equipment distribution will understand that sales
will be declining now. The more fundamental
questions might be how to continue to invest
in certain business lines that show long-term
promise and how quickly inventory levels in
less-promising segments should be brought
in line with current sales.
How can a bad fit be avoided?
I believe that there are many examples of
bad fits that have occurred over the past
expansion and period of easy liquidity.
Historically, when liquidity is easy to come
by, it is deployed beyond the core business —
by both the business and the bank.
Over the past decade, many banking customers sought the most credit availability
along with the least expensive and least
restrictive terms. Many banks sought to grow
by increasing volume in noncore areas and
by lowering price and loosening terms. When
liquidity becomes more restricted, the banks
want to exit the noncore businesses, but the
company may find it impossible at that time
to secure required financing on any terms.
So, avoiding a bad fit means looking
beyond the immediate need and immediate
offer from a bank — beyond the current pricing and terms. It means analyzing your bank
just as a bank should analyze your business.
How should a business analyze a bank?
First, does the bank have the capacity to
work with your business during tough times?
Second, and more importantly, does the bank
have the willingness to do so?
A good start is to evaluate a bank on the following five criteria:
1) Does the bank have the financial capacity to handle downturns? You should start
with questions about capital adequacy —
how much capital does the bank have in relation to its overall balance sheet? This is generally measured in terms of a percentage of
risk-weighted loans.
2) Does the bank have a demonstrated
long-term commitment to your industry and
size of business? Ask what percentage of the
bank’s assets are deployed in businesses similar to yours, and what is the breakdown
between retail assets and business assets.
3) In discussions with your local banker
and senior bank management, do you feel
they have adequately identified the risks of
your business? The bank needs to understand the business risks before you can feel
comfortable that it has the ability and willingness to handle them.
4) Has the bank successfully negotiated
downturns in your industry, and how many?
Many banks that have not experienced a sufficiently difficult downturn have not had to
make hard decisions about their banking philosophy and core markets. Ask about the
longevity of banking relationships through
several business cycles.
5) Evaluate the current relationship, which
provides a good perspective on a bank’s overall portfolio. If all of the bank’s relationships
are structured like yours, will it be willing and
able to support your business in a downturn?
How should one start the process of finding a
good banking fit?
Start with an evaluation of your current
bank on the five criteria, but also build a relationship with several other bankers so you
can evaluate them, as well. Ask your CPA or
law firm for recommendations, if needed.
Look for banks that are organizationally stable — not distracted by an acquisition, capital raising or other exercise that makes it
harder to evaluate how a bank will react in
the future. Finally, look beyond the current
need to how things might look in a few years.
Look for banking partners that can help your
business now and in the future.
EDMUND OZORIO is senior vice president of Comerica Bank’s Western Market. Reach him at (619) 652-5775 or [email protected].
