The right fit Featured

7:00pm EDT January 26, 2009

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