Most business owners don’t think about their banking relationships until something breaks.
They work and then you need a line of credit, buy equipment, take on a big contract, or hit a rough quarter. Then your bank is not just where your money sits, it is part of what keeps your business going.
As your business grows, so do the “relationships” with the bank: operating accounts, line of credit (LOC), term debt, and the people inside the bank who can help you when you need an exception.
But unfortunately for most, they aren’t even sure how to navigate the system and what’s important. They ask me the same questions:
Have I outgrown my bank?Does my bank fit my needs? Is there something way better out there.
The short answer is maybe, but maybe not. Satisfied? I thought you would be!
So, because of those questions, I decided to put together a list of criteria of things to consider when evaluating your banking relationships.
THE 5 FILTERS: HOW TO PICK THE RIGHT BANK
1) FIT: DOES THIS BANK UNDERSTAND YOUR BUSINESS?
If you are the “odd duck” for a bank, everything gets harder. Deals take longer, credit gets tighter, and you spend more time explaining what should be obvious.
A few questions that quickly reveal fit:
- What types of businesses do you primarily serve?
- What industries do you avoid?
- What does your typical borrower look like (size, margin profile, asset base)?
- What are the common reasons deals get declined?
By understanding how familiar your business is to the bank, you can know that when you come across a new problem, it's not the first time they’ve dealt with it.
2) PRODUCTS: DO THEY HAVE WHAT YOU NEED NOW (AND WHAT YOU’LL NEED NEXT)?
Most owners open an account when they start their business and never look back. It was either your personal bank or a bank someone recommended.
It's rare that outside of that, you know much about what they have to offer.
This is when a lot of businesses hit the next stage of needing more services and then realizing the bank cannot support them.
Ask:
- What banking services do companies like mine use most?
- What do you expect I will need at the next stage (10 to 50% growth)?
- What does treasury and operations support look like, beyond the banker?
By asking these questions, you also get a better understanding of what they know about their business and how they can help you as you grow and evolve.
3) PROCESS: WHO ACTUALLY APPROVES YOUR DEBT, AND HOW DOES IT CHANGE AS YOU GROW?
This is the topic I've seen the most surprises on over the years. Business owners have one banking contact and assume that they're the answer to all the questions. They assume they approve things and that they'll take care of them no matter what and sometimes they do but often things escalate to a point that they need to get other parties involved.
This is where understanding your bank's process is important. We want to understand their organizational structure, the approval limits at each level of the organization, and normal timeline to close on debt.
Ask:
- What is your personal approval limit? Who gets involved when it goes over their limit?
- Does it go to a loan committee, and how often does that committee meet?
- What changes when we request an increase, not just a renewal?
- What is a normal timeline for a renewal vs. an increase?
If you run a fast-moving business, a slow approval chain costs you opportunities and creates stress.
Understanding where approvals change, who is involved, and the timelines helps the relationship work better.
When you ask these questions, you'll often get introduced to the players before you actually have an ask. This is great for relationships and increases your likelihood of approval when you do need something.
4) ACCESS: CAN YOU BUILD MORE THAN ONE ADVOCATE INSIDE THE BANK?
A relationship is fragile if you only know one person. People change jobs, banks reorganize and change priorities, and credit teams rotate.
Ask:
- Who else will be involved (credit, treasury, branch support, relationship manager)?
- Who does my banker report to?
- If my banker leaves, who owns the relationship?
Building these relationships helps put a face to the spreadsheet that they typically look at. For that analyst, it becomes a lot easier to analyze fairly with that additional color, instead of just being a number.
Once you’ve met the players, do a simple gut check. Do you trust them? Do they understand your goals? Will they go to bat for you when it matters?
Sometimes your banker can love you, but if their team is difficult to deal with, your life can still be hard. If the credit analyst or the next level approver doesn't understand your business, this can matter more than your friendship with the banker.
5) FUTURE: CAN THIS BANK HOLD YOUR RELATIONSHIP AS YOU SCALE?
Banks are limited by regulation and their bank's risk profile. Understanding their loan-to-deposit and lending caps helps you see what type of bank you’re working with.
Loan-to-deposit ratio is how many dollars of loans they have compared to the deposits in the bank. A lower ratio usually means the bank is more liquid and has more room to lend, while a higher ratio can mean they’re closer to “fully lent” and may get tighter on new credit. It also tells you the overall risk profile of the bank.
Lending limits are maxed at 15% of the bank’s capital based on regulations in the US. So if a bank has $35M in capital, a rough cap is about $5M.
Look up this information by searching the bank's name and looking for “financials” or “assets.” These won't be the exact numbers today, but you can get a good general idea of where they sit and what questions you need to ask going forward.
Ask:
- If we grow 25%, 50%, or 100%, what changes about what you can do for us?
- What are your concentration limits (industry, customer concentration, collateral type)? Do you have any restrictions from over-concentration or regulator guidance?
- What would cause you to reduce exposure to a borrower like us?
This will give you a good idea not only of if they're a good bank today but also of how well they can serve you in the future.
6) UNDERSTAND THE COVENANTS (THIS IS WHERE TWO “SIMILAR” DEALS ARE NOT SIMILAR)
You can have two proposals that look identical on rate and structure, but the covenants make one workable and the other a landmine.
I’ve seen owners accept a term sheet and only later realize they didn’t historically meet the covenants. If you sign that, you can start the relationship already in default, and that can become a disaster when you need flexibility the most.
If you can’t clearly explain the covenants (in plain English) and prove you can comply, you are not done evaluating the deal.
Asking for a sample covenant calculation from the bank (so you can match their math) based on previous financials is a great way to ensure you understand what the covenants mean.
THE 5 COVENANT QUESTIONS I ALWAYS RUN
1) WHAT EXACTLY ARE THEY MEASURING?
“DSCR” and “leverage” sound standard (and they are), but I’ve seen banks have very different approaches to them. One bank’s EBITDA is another bank’s “EBITDA minus owner comp addbacks, minus one-time items.” Small definition changes create big compliance differences.
2) WHAT’S THE REAL CUSHION?
Do not ask “Can we comply with the convenant’s today?” Ask “What’s our worst-month / worst-quarter performance historically, and how does that compare?”
If the covenant is tight in normal operations, but then going to break during a rough quarter (exactly when you need the bank to lean in), it’s a bad covenant for you.
3) WHAT TRIGGERS A DEFAULT AND WHAT HAPPENS NEXT?
Clarify:
- Is it an automatic default or a grace period?
- How long is the grace period?
- Does a covenant breach freeze availability on the LOC?
- Can they increase pricing, require paydown, or demand more collateral?
This is where the “risk” becomes real because if they pull the plug immediately, your business is in trouble. Most won’t do this, but I’ve heard some horror stories.
4) WHAT REPORTING / COMPLIANCE WORK DOES THIS CREATE?
Some covenants are easy; some force a mini-audit every quarter. If they require monthly borrowing base reporting, AR aging by category, or frequent CPA-reviewed or audited statements, that’s a real operational tax you need to take into account.
While they’ll likely tell you what they want, ask for examples to you make sure you have a deep understanding of what’s required.
5) WHAT WOULD YOU NEGOTIATE BEFORE YOU SIGN?
If you are close, negotiate up front:
- More headroom (thresholds)
- Step-downs/step-ups tied to performance
- Better definitions (EBITDA addbacks, treatment of distributions, owner comp)
- Springing covenants (only apply when utilization exceeds X%)
Tie these negotiates to the plans you have. If you’ve ran the numbers, show them those numbers. If the right proof, banks are often willing to make adjustments and “give” more than you may expect.
YOUR FIRST STEP IN THE NEXT 24 HOURS
Pull the last 12 months (or 8 quarters) of financials and run the covenant math as if you already had the loan. If you don’t know the exact definitions, that’s your signal to get them clarified before you move forward.
THE PRACTICAL CLOSE
You do not need the biggest bank, you need the right bank. One that understands your business and can actually approve what you need.
I’d encourage you: over the next 24 hours, write down three things you might need from your bank in the next 12 months (LOC renewal, equipment purchase, real estate, merchant services) and then ask your banker:
- more about their products
- who approves each one
- what changes when you ask for more
Also, run your covenant math if you’re not already. Understand how numbers would have to change to change those outcomes, and then ask how likely those outcomes are.
With these simple things, you can have a much more solid banking relationship.
