Recently, my newspaper reported that a local bank “…earned a four star excellence rating for the sixty-fourth consecutive quarter.” That’s sixteen years of four star excellence! The article went on to say that the “rating is based on a complex formula that includes …capital safety levels, quality of loan portfolio, and the ability to meet obligations…” The press release was designed to showcase the value of this bank and demonstrate its prominent position in the economy.
As a former banker with over seventeen years of commercial experience, I chuckle at this information being tossed around by the bank and its regulatory agencies for self promotion and marketing purposes. I suppose that if you are a blue-hair whose purpose is to find somewhere other than under the mattress to keep your retirement funds, this article was good news. But what does it mean to the business owner or entrepreneur looking for a Funding partner to participate in an opportunity to grow, increase jobs and profit? In a nutshell this type of information should be a wake up call to find another bank-here’s why.
Let’s explore the underlying meaning to business customers behind a portion of this “complex formula.”
Capital Safety Level
In layman’s terms this means that the bank has more than adequate reserves of Cash. Cash that is available, but not loaned out – its Capital Safe. Banks that have high reserves of Capital can be presumed to be low on the scale of aggressive lending. They hoard Cash – even though they cannot make the same return on reserved Cash as they can on employed Cash. But for the bank, it’s less risky to hoard Cash than to loan Cash, and therefore contributes to their four-star excellence rating.
Quality of Loan Portfolio
A high quality loan portfolio means that the bank’s loan loss experience is at or above levels set by regulatory agencies. One can infer that the bank therefore takes fewer risks. Bankers are not supposed to be entrepreneurial or take risk. A banker has never been rewarded for taking risk! The banking system rewards those who can decline any borrowing request outside of the underwriting parameters. Loan portfolio quality that’s high = low loan accessibility to business owners. It stands to reason that banks are not risk takers based upon the low returns they are willing to accept.
Banks with four star excellence ratings seek out commercial customers who are stable and have limited need to borrow. The other 72% of business customers are left outside the circle of these banks. Where do these businesses turn to Cash Flow the Working Capital needs of their business? Where do they go to fund opportunities for growth and development of new market niches? More often than not they turn to the widely accepted world of non-traditional funding sources – preferred SBA lending companies for real estate and fixed asset needs, leasing companies for equipment needs, and Factoring companies for Working Capital needs. These non-traditional funding sources evaluate opportunities to participate by lending funds to small & medium sized businesses. Non-traditional lenders rates on borrowed funds may be higher than traditional bank rates, but their mission is to employ funds to obtain a return, not to let cash sit idle on the sideline in order to obtain a four star excellence rating. Their pricing reflects the perceived risk. And, they are not restricted by regulatory bureaucracy or fear of losing their four star rating as banks are.
In this ever changing world, business owners are advised to explore opportunities outside of the traditional financing channels. Before a need arises a business should be familiar with alternative funding sources. And perhaps, when your bank informs you that they continue to achieve a four-star excellence rating…it would be wise to investigate your options pertaining to Working Capital and Cash Flow solutions.