With the economy showing mixed signals, it’s a critical time for growth-oriented companies to reevaluate the strength of their banking relationship, which could serve as an essential component in achieving longer-term expansion plans. This is especially true if the macroeconomic picture starts to worsen.
On the positive side, at this late stage of the economic cycle, unemployment is still near record lows for San Diego—3.6% as of July according to the Bureau of Labor Statistics. Interest rates are falling, capital is still widely available.
But let’s not forget the enduring headwinds: there’s the tariff war with China of course, which has crimped the county’s growth of gross domestic product, as importers of everything from industrial parts to electric bikes feel the pinch, and exporters face declining Chinese demand for their products. The current economic expansion is also more than 10 years old—the longest in history.
Here in San Diego, we have one of the nation’s vibrant economies, fueled by industries such as defense, healthcare, technology, biotech and tourism. These companies in particular have an acute need for capital to fund acquisitions and investment.
With respect to finance, the big question is whether your bank will be able to support your business if the economy slows. As part of your own due diligence, here are five questions to ask your bank to help determine whether it can serve as a vital partner for the long haul:
1. Tell us about the strength of your balance sheet.
Your bank should have a capital ratio—a gauge of how much it has in reserves in case of defaults—well above what’s considered adequate by regulators. A bank with strong capital ratios will allow it to be in the market at any time to support your company’s financial needs. Also ask about recent quarterly trends of nonperforming assets—loans that haven’t been paid in 90 days. Look for a number less than 1% of loans outstanding.
2. Who makes decisions and how are loans approved?
How the leadership is structured will give you insight on how quickly the bank would be able to approve financing. Does the bank keep decision-making close to San Diego, with those who are deeply familiar with the region and its companies? The largest banks might have five or even 10 individuals across the country or even the globe needed to sign off on a deal. Knowing approval times will prove critical when there’s a sudden opportunity to bid on a company and make an acquisition.
3. Tell us about your risk appetite.
How does the bank approach lending? Does it appear to be taking calculated, educated, and prudent risks? How much can the bank finance? For most banks, the sweet spot is three times the amount of cash a company has generated over the last 12 months. But with fast-growing companies—a bank might be willing to go four-times cash flow. With these situations, the bank is taking into account a company’s prospects to grow, rather than just relying on past cash flow. If you have strong projections for the coming years, your banker should take this into consideration.
4. How are you feeling about your customers in this economy?
Gauge whether your bank is on top of macroeconomic trends and thinking ahead for its customers. Banks need to have a deep understanding of what a potential downturn will do to a business’ clients. They should also be able to give an objective opinion on how changes in working capital will affect the cashflow cycle when a recession does arrive.
5. What sectors/industries are you currently supporting?
Bankers should be able to look deeply into your customer projections, business profile and industry specific condition, because each industry gets impacted differently. Banks with subject matter experts in particular disciplines build confidence with customers. These bankers take the time to understand the industry and how its business performs at the various stages of the overall economic cycle.
By asking these kinds of questions, you will ensure your bank isn’t just a lender, but a financial partner that will help your business stay on its growth track. A strongly-capitalized, in-market, corporate bank can serve you well in that journey.
