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For startups, ensuring a stable, efficient, and long-term banking setup is one of many challenges. This challenge is compounded by an overwhelming array of potential banking partners, various banking types, and the need to work with at least two banks to ensure competition and diversification. This short article will give you some ideas on how to find the ideal banking set-up for startups, firstly by focusing on your business needs, and secondly by outlining some success factors to help you select banks and build a long-term partnerships.

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01 Evaluating your business needs

Take a moment and reflect what you expect from a bank - Navigating your banking partnerships ranges from relatively simple interactions such as discussing everyday tasks like moving funds or authorizing transactions to complex and strategic decisions about your future equity, debt, and mezzanine funding strategy. Your needs include much more than just selecting the flashiest banking products. Before embarking on searching fitting banks, take a moment to clearly define your needs and expectations.

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# What do you expect from your bank?

Beyond just products - Once you integrate a bank into your company’s infrastructure, it´s part of your supply chain, and can emerge as a worthy business partner. That’s why it is important to take more things into account than just the product portfolio or the banks fee structure. Be clear about your own mission, and associated values to achieve your goals. How do you value following aspects:

  • long-term stability: Resilience of bank and your common partnership
  • startup and industry expertise: Banks as advisors, not only service providers
  • sustainability and reputation: Banks as part of your supply chain with shared values
  • range of product portfolio: Ability to meet future needs of your company
  • quality of customer services and speed of decision: Ensuring seamless operations matching your company’s speed
  • geographical presence: alignment with your activities and ties with your headquarter's region
  • fee structures: Full transparency and fairness
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# How will your business be structured in 3-5 years?

As your business grows, so does the range of banking products you need - Initially you may only need a small range of banking products and your banking relationship starts with stable payment solutions. As your business grows, business relationships become international, credit ratings become more important and your balance sheet expands, your need for a wider range of banking products and services will increase. Thinking ahead ensures that banking solutions are aligned with your current operations and growth. Ask yourself where you want to be in 3-5 years:

  • How is your company structured? (Location / Region / Subsidiaries / Jurisdictions)
  • Who are your key partners, what are your key resources, what is your customer relationship like?
  • Where is revenue generated and where does money flow?
  • Who are your suppliers/customers and where will they be located?
  • What does your balance sheet and capital structure look like?

Let’s deep dive into some of the mentioned preconditions to build a long-term, successful relationship with your banks.

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02 Banks as long-term, strategic partners for your startup

A variety of factors for long-lasting business relationships - The comprehensive definition, selection, and evaluation of the factors for a successful business relationship with one's banks can only be determined individually. Nevertheless, it's worthwhile to elaborate on some factors, as their relevance has been proven by market´s experience. While focusing on these factors, it´s important to state that not only banks among themselves show notable divergences, but also differences within the locations and the respective contact persons of individual banks can be seen.

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# Long-term stability

In the ever-changing landscape of the financial industry, ensuring the stability of the banking institutions that your startup partners with can be critical. The ability of a bank to weather economic turmoil is crucial for maintaining uninterrupted financial operations and preserving your company's assets, especially after raising millions in equity. Since the bankruptcy of Silicon Valley Bank in 2023, it has repeatedly become clear that companies need to pay more attention to their choice of banks. While risk can be reduced by spreading your money between banks (public-sector banks are quite popular to keep money safe), it´s worthwhile knowing indicators to asses stability of a bank.

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Credit Default Swaps

Credit Default Swaps (CDS) – CDS are a quantitative measure used to assess the credit risk of a bank. They reflect the spread in interest rates between a risk-free asset and the interest rate charged by the bank on its own loans. Thus, the CDS represent the premium, which investors demand for taking on the risk of a bank's potential default on its obligations. The higher the CDS the higher the perceived risk of default. Focusing on CDS ensures that you can leverage market expectations. The “Deutscher Derivate Verband” regularly publishes an overview of CDS from banks as shown in the chart (Click here).

Bank Credit Ratings - Ratings assigned by credit rating agencies offer a comprehensive evaluation of a bank's stability and creditworthiness as well. Well known agencies like Moody's, Standard & Poor's, and Fitch follow own approaches and analyze various financial metrics and qualitative factors to provide an overall rating. Since these ratings incorporate a combination of quantitative data and expert analysis, it makes them a valuable KPI in assessing bank stability.

Stress Test Results - Banks often undergo stress tests to evaluate their resilience in adverse economic scenarios. Reviewing a bank's stress test results can offer insights into its capacity to withstand economic downturns.

It´s important and calming to understand that it would take strong market dislocations to bring well-established banks into payment difficulties. But the consequence of increases in default-risk alone can cause banks to adjust their strategies, which have an impact on product portfolios, fees and the overall consistency of business relationships with different client segments.

Knowing how to understand indicators of stability alone is not enough. You need to be able to evaluate a bank’s ability to assess a startup’s environment and their overall dedication for your segment.

Key Takeaways - find a safe haven

  • Assess stability as an indicator of banks' resilience during market turbulence and monitor its evolution
  • Do not put all of your eggs in one basket and diversify your liquidity
  • Follow up on dicussions with banks

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# Startup expertise

Finding the right contact- It's not solely important which bank you talk to, but also which department or even which person you talk to. As a business, you will be assigned to a specific client cluster within the bank. The clusters are usually based on your turnover and your company's product requirements. It's very important that the bank shares your growth case and places you in a customer cluster that is relevant to the bank. As you are at the beginning of your journey, make sure you are placed in a cluster that is designed for start-ups or mid-sized companies; avoid being placed in a highly standardised, cross-sectoral small company client cluster. The quality of support from the bank will be better. After all, you want a bank that will continue to meet your needs in the future. In addition, the complexity of a venture-backed company is greater than that of a typical small business. Whether it's managing cash flow, optimising working capital or navigating regulatory hurdles, a banking team that speaks your language and can walk alongside you can make a significant difference.

Credit ratings – A credit rating reflects a certain probability of default and is calculated using not only quantitative but also qualitative KPIs. There are usually more than 15 possible rating levels, which can be categorised in a similar way to the well-known bond ratings: Prime, Investment Grade, Non-Investment Grade, Speculative Grade, Default. The risk appetite of banks and their internal ratings-based approaches vary considerably between institutions. It's common that various banks calculate different default probabilities for the same company and show different hurdles for different financing products. Because there are different rating-based approaches, it's important to look closely at the approach together with your banks and actively ask what the rating hurdle is for debt deals. By being fully transparent, you can at least influence the qualitative KPIs of the rating approach. Low credit ratings for startups are usually due to poor historical financial results, early stage volatility, limited credit history and therefore higher default risk compared to established companies; which makes some banks shy away from startups.

Showing your potential - If you find a bank that doesn't run away from your credit rating, it's important to recognize that while the overall business with corporates is highly profitable for banks, the client base of startups represents a small share of that business. Obviously, lending at higher volume and selling more products increases attractivity. In recent years some of the big German banks focused on reducing risk in their corporate clients lending portfolio by eliminating customers with bad credit ratings, rather than leveraging growth opportunities and engaging with high-risk-high-reward clients. The return on risk-weighted assets has become one of the hottest KPIs. Since the volume of risk-weighted assets is determined by the overall default risk in the credit portfolio, it is obvious that the business with startups is rarely a priority for banks. That’s why it is very important to make sure a potential bank acknowledges your growth potential, understands your environment, your business plan, believes your story and therefore has a mid-/long-term view on the profitability of the relationship.

Finding the right contact - It's not solely be important which bank you talk to, but also which department or even which person you talk to. As a business, you will be assigned to a specific client cluster within the bank. The clusters are usually based on your turnover and your company's product requirements. It's very important that the bank shares your growth case and places you in a customer cluster that is relevant to the bank. As you are at the beginning of your journey, make sure you are placed in a cluster that is designed for start-ups or mid-sized companies; avoid being placed in a highly standardised, cross-sectoral small company client cluster. The quality of support from the bank will be better. After all, you want a bank that will continue to meet your needs in the future. In addition, the complexity of a venture-backed company is greater than that of a typical small business. Whether it's managing cash flow, optimising working capital or navigating regulatory hurdles, a banking team that speaks your language and can walk alongside you can make a significant difference.

Key Takeaways - Find banks that understand your business and are fully transparent

  • Ask your network and share experiences
  • Discuss credit ratings, hurdle rates for debt financing business with the bank
  • Make sure you are placed with a group of clients that meet your future needs and has startup experience. Focus on future potential for both sides - your company and the bank
  • Challenge the banker's understanding of the volatile startup environment
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Fair Finance Guide

# Sustainability and reputation

Financing partners as part of your supply chain - sustainability has become a core value, influencing decisions across all industries and attracting the attention of regulators. It´s vital to consider sustainability not only within your business, but also throughout your supply chain. This includes your banking setup. Environmental, social and governance (ESG) principles are critical to long-term success and should be an integral part of a bank. Align your values with your bank's ESG performance.

A bank's sustainability can be assessed by looking at its ESG ratings. ESG ratings serve as a tool for investors, regulators and stakeholders interested in understanding a bank's commitment to sustainability. These ratings assess various aspects of a banks operations and practices to provide a comprehensive view of its environmental, social and governance performance. Agencies typically consider a bank's impact on a wide range of issues. One of the most important factors is a bank's financing and investment activities in critical sectors, and its practices in relation to tax, money laundering and terrorist financing, etc. Other factors may include:

  • Environmental (E) - impact on biodiversity, carbon emissions, water use, waste management
  • Social (S) - diversity and inclusion, employee satisfaction, community engagement
  • Governance (G) - board independence, ethical behaviour, transparency, disclosure.

Look for ESG ratings from agencies such as Sustainable Fitch, ISS ESG, Sustainalytics, MSCI, imug, but also from organisations such as WWF or Fair Finance. Sustainalytics, for example, offers a quick way to compare risk ratings between companies (click here). You can also check the sustainability reports of banks and read about their policies on critical sectors such as coal, arms, gambling, etc. Fair Finance has looked at the published policies of German banks, resulting in a rating.

Key Takeaways - See banks as part of your supply chain and value sustainability

  • Highlight your values and compare them with the ESG performance of potential banks
  • Look at the ESG ratings of potential banks
  • Be authentic throughout. Do not greenwash your mission.
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# Range of product portfolio

The product portfolio and quality offered by a bank can have a significant impact on your startup's operations and overall success. It's important to match your startup's future needs with the services and solutions offered by potential banking partners. Since a large percentage of European banks are universal banks and offer a wide range of products, you can focus on one or two main banks and add secondary banks as needed for individual products. Think about your future structure while looking at the overview of banking products.

Key Takeaways - Focus on one or two primary banks and add secondary banks for specific niche products

  • Consider current and future needs when selecting primary banks
  • Advisory services from banks can sometimes be free of charge
  • Discuss product portfolio strengths and weaknesses with your network and banks

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# Quality of customer service

As a startup, establishing a strong relationship with your banking partner is essential, and the quality of customer service plays a key role in this equation. Here are some skills you should look for to identify a successful banker.

Responsiveness and personal availability: In your rapidly evolving business environment, time is of the essence. A corporate banker must be highly responsive. Whether it's responding to inquiries, providing financial solutions or resolving issues, a responsive banker ensures that your financial needs are met promptly and efficiently. Knowing that you can reach your banker when you need to, not a hotline, ensures a smooth banking experience.

Honest, open and straightforward communication: Transparency is the foundation of any successful relationship. Communication between you and your banker must be honest, open and straightforward. This means not only delivering good news, but also being upfront about challenges, potential risks, and limitations of the relationship. A high level of transparency fosters trust, a critical element in any long-term relationship.

Understanding your business: A one-size-fits-all approach doesn't work in corporate banking. Your banker should take the time to understand the complexities of your startup, its industry and its unique financial needs. A banker who understands your business is better equipped to tailor financial solutions that align with your goals and objectives.

Mutual long-term goals instead of short-term profits for your banker: While banks are for-profit businesses, you shouldn't feel pressured by your banker to buy products or services that don't meet your company's needs. A quality banker will focus on building a mutually beneficial relationship rather than pushing products as a sales incentive.

Strategic exchange and a complete picture of your banking landscape: Beyond traditional banking services, quality bankers should serve as trusted advisors. They should be able to provide strategic guidance to help you navigate complex financial decisions and opportunities. This means not only understanding your immediate financial needs, but also having a comprehensive view of your entire banking landscape. A banker who can provide insight into optimizing your financial strategy, managing risk and capitalizing on emerging opportunities is an invaluable asset to any startup. This holistic approach ensures that your banking relationship is not just transactional, but focused on your long-term financial success and aligned with your company's growth trajectory.

Key Takeaways - Account manager skills have a significant impact on the quality of service you receive from your bank.

  • Find a banker who truly cares about your long-term success
  • Your bankers should be strategic sparring partners, not just service partners
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# Geographical presence

As a startup, you need to weigh the pros and cons of regional and international banks to determine which best suits your evolving needs. The decision to work with international banks should be aligned with your startup's growth strategy and timeline. Early-stage startups may thrive with regional banks due to their localized focus and personalized services. However, as your startup matures and looks to expand globally, consider integrating international banks into your banking landscape. Building a diversified banking relationship that includes both regional and international banks can provide the flexibility and comprehensive support needed to succeed in interconnected markets.

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Advantages of international banks

  • Global Reach: International banks have a broad global presence, making them essential for startups looking to expand internationally.
  • Comprehensive Services: They offer a wide range of services, including foreign exchange and international trade finance, facilitating global expansion.
  • Access to International Capital Markets: International banks provide access to international capital markets, offering diverse financing options for growth and potential acquisitions on a global scale.
  • Risk Mitigation: They assist with risk management in the complex landscape of cross-border operations, offering insights and strategies to deal with challenges like currency fluctuations and regulatory issues.
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Advantages of regional banks

  • Proximity and Accessibility: Regional banks are readily available for in-person meetings and discussions, fostering a more personal and responsive banking relationship.
  • Local Understanding: They have a deep understanding of the local business landscape, making them highly attuned to the unique needs of startups in the region.
  • Community Engagement: Regional banks engage in the local community, prioritizing the importance of startups in the region, which can provide networking and local support opportunities.
  • Customized Solutions: They specialize in serving local businesses, enabling them to offer customized financial solutions and industry-specific expertise tailored to a startup's specific requirements.

Key Takeaway - Weighing the pros and cons of regional and international banks

  • Thrive with regional banks and include international banks to be prepared when needed
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# Fee structures

A bank's fee structure plays a critical role in the financial health of your startup. Conduct a thorough evaluation of potential banking partners, considering not only their fee structures, but also the overall value they provide. Prioritize transparency, cost-effectiveness, and alignment with your startup's banking needs to make an informed decision that supports your business goals and financial stability.

A transparent fee structure is essential. Look for banks that clearly outline their fees for various services, such as account maintenance, wire transfers, and overdrafts. Hidden or unexpected fees can significantly impact your startup's cash flow. Because your startup operates on a tight budget, it's important to evaluate how the bank's fees align with your financial capabilities. Compare the cost of banking services at different banks to ensure you're getting a competitive and cost-effective deal. Don't hesitate to negotiate with the bank, especially if you bring in a significant amount of business or have the potential for growth. Banks may be willing to offer customized fee structures or incentives to attract and retain your startup's business.

Key Takeaway - A transparent fee structure is essential

  • Value full transparency and create competition between banks
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03 Summary and ideal banking setup

Identifying the key factors of long-term stability, startup and industry expertise, sustainability and reputation, product range, quality of customer service and speed of decision, geographical presence and fee structures provides an overview of what to focus on to create a successful, long-term banking setup for your start-up. While keeping in mind that the right banking setup is highly individual, considering the key takeaways of this article will ensure a good foundation for your journey to an ideal banking setup, which could be summarized as follows.

Your startup is very sure about its own current and future needs and expectations. Your mission and associated values are clear and represented by your business partners, including your banks. Your startup is already a client of four long-term stable banks:

  • One is an international, public sector, universal bank (house bank)
  • One is an international, highly professional universal bank (primary bank)
  • One is a strong regional bank (secondary bank)
  • One is a niche bank (secondary bank)

Since the banks want to do business with you, you have created a competitive environment for the banks. You are able to discuss strengths, weaknesses, fees, and other issues with all four bankers in a highly transparent manner. With two of them, you have regular strategic discussions because they have a lot of experience with young companies and in your startup sector.

Have fun on your way to a successful, long-term banking relationship!