Choosing a bank for your startup is a critical step, but not all banks are created equal. While your local bank may be a great resource for your personal needs, it might not be the best choice when it comes to managing your business’ finances. It’s important to work with a bank that you have confidence in and consider to be a strategic partner. Even more important, you will want a bank that can assist your company with its capital needs during its early stages.
Unfortunately, many businesses fail to find the right fit for their business. According to a 2013 Gallup Business Banking Study, 32% of businesses have an actively antagonistic relationship with their primary bank. When it comes to the unique needs of startups, it’s critical to find a bank that understands the various stages of your startup’s business life span.
So, what does it mean to be a startup friendly bank? Here is the criteria we use to define a startup friendly bank:
Startup friendly banks specifically cater to startups and have packages and services that take into account the timing and needs of startups
There are often fees associated with opening a bank account such as initial deposit amounts, minimum balances, maintenance, transaction limits, wires, and more. While the individual fees may seem small, combined, they can quickly add up and start to eat into your cash. Startup friendly banks tend to minimize these fees, but without sacrificing quality.
Startups are unpredictable and a good startup friendly bank knows that all too well. They tend to provide greater flexibility than some of the larger commercial banks do by being more accommodating through the ups and downs of starting and growing your business. Banks like Bridge Bank, SVB, Square 1, Comerica, and others have special packages exclusively for startups. Examples of special features include $0 balance requirement for the first twenty-four months or waived seed funding wire fees.
Startup friendly banks have extensive experience servicing startups and provide substantial networking and introduction opportunities
One of the biggest benefits of going with a startup friendly bank is their network. Startup friendly banks tend to have a large network of bankers, entrepreneurs, and investors who have experience in a wide range of verticals. These banks often hold networking events and informational seminars to help their clients and provide industry expertise when startups have questions or are facing particular challenges. If you are a startup focused on health care technologies, for example, there are banks with divisions specifically designed for helping healthcare companies with their finance needs. This sort of natural synergy can make it easier to receive venture debt or lines of credit.
Startup friendly banks can provide the ability to secure more favorable terms
Large banks focus primarily on multi-national corporate companies that have substantial revenues and assets. As a result, their risk tolerance is much lower than that of a typical startup friendly bank.
Conversely, startup friendly banks are more willing to have a higher risk tolerance and thus can often provide more favorable terms for loans or lines of credit. This could prevent the need for a personal guarantee on a loan. A personal guarantee is an unsecured written promise that the founder will pay back the loan if the business is unable to. You should try to avoid personal guarantees on term loans if possible.
Working with a startup friendly bank can also help mitigate financial covenants and fees. Financial covenants are ratios that the borrower is required to stay above or below. These can impact the purchase of new assets, the use of the borrowed funds, or even compensation for team members.
Lastly, term loans such as Venture Debt, Accounts Receivable (A/R) lines of credit, and Monthly Recurring Revenue (MRR) lines of credit aren’t always something that larger banks tend to specialize in. These term loans are essential in extending a startup’s runway and cash flow. When/if it is time for your startups to pursue a term loan, it’s helpful to have already built a relationship and an account history with a knowledgeable startup friendly banking partner.
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