What Should You Look For in a Bank?

This post is part of a series that I’m doing to respond directly to reader questions.

Today’s question is: “What do I look for in a banking relationship, and does it really matter?”

There’s not a lot of love circulated for bankers. Most people think of a banking relationship as a necessary evil, not something that can actually be an asset to your business. The reality is altogether different.

I asked my good friend Zack Mansfield, who’s a big muckety-muck at Square 1 Bank, to talk about what to look for when you’re choosing a bank for your startup. The questions are mine, the answers are Zack’s.  Contact information for Zack is at the end of this post if you’ve got additional questions. I highly recommend both Zack and Square 1. Here goes!

What’s the difference between banking with a mainstream bank (Wells Fargo, BB&T, etc.) vs a more startup-focused bank like Square 1 Bank or Silicon Valley Bank?

The reality is that banking is pretty commoditized and you can do the basics with just about anyone.  By basics I mean things like treasury services (checking and money market accounts), online banking, checks, credit cards, etc.  The differences are going to be in the level of personal service as well as the understanding of the unique needs of a startup or high growth company that banks like SVB and Square 1 understand at a much greater level than a regular retail bank.

For instance, if you are growing a software business today it’s likely one that is using a SaaS model.  The only assets you are going to have are the IP you’re creating – you’re ramping up AWS instances, may even work with multiple team members remotely, and may not even accept physical payments once you start selling a product (if you sell via credit card or online transactions).  Thus, the need for a physical bank branch location is de minimis at best.  What you really will need is a bank that has an online platform that allows you to transact and download history into your accounting system, can connect with Stripe, Braintree, or whatever payment processor you’re using, and is available with personalized, one-on-one attention when you actually do need help.  This type of relationship is accomplished best with a niche player that is focused on this type of business – someone like a Square 1 or SVB.

Finally, the other obvious and major difference is that the venture banks will be willing to offer debt capital to much earlier stage companies than traditional banks.  Banks like SVB and Square 1 will usually get involved with companies after they’ve raised a first institutional round of venture capital.  This is often with companies that are cash burning and in some cases are even pre-revenue.  Traditional banks need to see historical positive cash flow or hard assets before making a loan.  This is a huge difference and represents fundamentally different underwriting philosophies.  This is not to say that one is better than the other, just different.

 What’s the comparative risk tolerance among the various kinds of banks?

As noted a bit above, venture banks are willing to get involved earlier in the life cycle of a company because they are underwriting not just the hard assets or cash flows but also trying to understand the dynamics around the future equity funding.

At Square 1 we have deep relationships and experience within the venture ecosystem – we have seen thousands of companies over the years and know the patterns around how these companies are funded.  Further, we have deep relationships with the equity providers and can leverage these relationships to understand the future equity funding plans.

When you are able to combine these qualitative factors with the quantitative or traditional business metrics, you can participate in a different part of the risk curve than traditional banks, and do so without incurring increased loan losses.  This is really important – at our core we are still a bank and as such are regulated and can’t take on undue risk.  But we can participate in different ways than more traditional lenders.

Why does a good banking relationship matter to a company?

At a minimum the banking relationship should just work – it shouldn’t be a source of frustration or operational friction.  At its best, the bank can be a strategic partner to help growth.  Whether it’s as simple as being able to help with working capital cycles or something more strategic like being another one of the trusted advisors at the ready to help your company move forward.

If you’re running a company you should be surrounding yourself with people who can help you increase the odds of success.  Working with a bank that has worked with other successful entrepreneurial companies – and thus has the corresponding sets of experiences and relationships – just makes sense.

What are the different ways to raise capital through banks like Square 1 Bank?

On the debt side, there are a variety of different types of debt facilities.  There are lines of credit which allow you to borrow against your accounts receivable or monthly recurring revenue. There are also term debt facilities which allow you to borrow a lump sum of money and pay it back over a defined period of time.  We often will combine structures and use a line alongside a piece of term debt.

The main point is that entrepreneurial companies are inherently volatile and there’s no one-size-fits-all solutions.  A good banker will work to find a solution that serves the holistic needs of the company.  This should also consider the overall financing plan – the ratio of debt to equity, the total capital need, the appropriate level of dilution, etc.  This is another reason it makes sense to work with a partner that has been through many different cycles with companies before.

Do banks participate in the equity fundraising process? If so, how? Intros, counsel, other?

We are very active in helping our companies as they navigate the fundraising process.  While we don’t make direct equity investments, we do a lot of intros to VCs (with consultation of the needs of both sides, both the entrepreneur and the investor).

Given our role in the ecosystem, we have some of the deepest and most intimate relationships of anyone, in terms of knowing the underlying financials of companies.  Yet we also have broad reach in terms of access to funds and experience working with different investors.  Thus, we can play a part in helping to remove friction or wasted effort in the fundraising process.

What are the three questions a new founder should ask a prospective banker before choosing a relationship?

  • How can you help beyond the basics of day to day banking?
  • What types of companies do you typically work with?
  • How do you grow the relationship with companies as they grow?

How can people reach out to you to find out more?

My most sincere thanks to Zack for taking the time to answer these questions.