When evaluating a capital provider for your agency's expansion, succession, or acquisition plans, it's crucial to choose a financial partner wisely, especially given recent interest rate fluctuations and banking uncertainties. The last thing you want is to be entangled in a buyout or loan negotiation only to discover that your capital provider is facing financial difficulties. Instead of halting your plans due to factors beyond your control, focus on finding a reliable financial partner by considering these five key characteristics.
Five Key Traits to Look for in a Reliable Financial Partner for Your Agency
- Past Performance: The longevity and consistency of a financial institution can offer insights into its reliability. Banks and capital providers that have successfully navigated past economic challenges, such as the 2008 banking crisis, are more likely to provide stable and consistent support. To assess this, review their historical performance, especially if they are insured by the Federal Deposit Insurance Corp. (FDIC). If a provider hesitates to share this information, it might be a red flag.
- Diversification: A diversified portfolio across various asset classes, sectors, and geographical regions is a hallmark of a strong financial institution. Diversification helps cushion the impact of downturns in specific areas, ensuring more stable operations. When evaluating a potential financial partner, inquire about their strategies for managing risk through diversification. A lack of diversity in their investments could indicate vulnerabilities that might affect their ability to support your agency's financial needs.
- High Liquidity: Liquidity refers to a financial institution's ability to meet its financial obligations without incurring significant losses. A highly liquid firm can quickly convert investment assets to cash, ensuring they can provide the necessary capital when you need it. To assess liquidity, consider the institution’s capital-to-assets ratio—aim for partners with a ratio at or above the national average, which was 8.62% in 2022. Additionally, ask about their deposit base, including the size and duration of deposits, and their lending limits.
- Strong Borrowing Capacity: While financial institutions are primarily lenders, they must also be able to borrow funds to meet demands, especially during times of high liquidity needs. Choosing a partner with robust borrowing capacity ensures that your agency will have the funds necessary to execute your growth or succession plans on time.
- Relationship-Based, Long-Term Support: A strong financial partner is one that values long-term relationships and can tailor their support to your agency's unique circumstances. Look for partners that are relationship-focused, as they often have more flexibility in their lending decisions and can adapt quickly to market changes. This type of support is essential for navigating both short-term challenges and long-term growth.
As the financial sector continues to experience turbulence, selecting a capital provider with strong past performance, high liquidity, robust borrowing capacity, and a commitment to long-term relationships can help ensure your agency's growth or succession plans remain on track.
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