Skip Ribbon Commands
Skip to main content



 ‭(Hidden)‬ Catalog-Item Reuse

How to Evaluate a Capital Provider

Here are five hallmarks of a strong financial institution to consider if you're an agency owner looking for a financial partner for expansion, succession or acquisition.
Sponsored by
how to evaluate a capital provider

If you're an agency owner looking for a financial partner for expansion, succession or acquisition, this year's interest rate changes and banking collapses may have you putting plans on pause. The last thing you want is to get into a buyout or loan negotiation and find out your capital provider is in trouble.

Instead of pausing due to factors beyond your control, find the right financial partner. Here are five hallmarks of a strong financial institution: 

1) Past performance. Consistency and continuity are critical to the success of financial institutions and, by extension, their clients. Banks and capital providers should be able to offer reliable capital and services, even in the face of unexpected circumstances or challenges.

While not a guarantee, you can get a sense of your partner's strength and stability by looking at how they've weathered previous economic challenges. How long have they been in business? How did they perform during the 2008 banking crisis?

For any Federal Deposit Insurance Corp. (FDIC)-insured institutions, you can find current and historical performance data at the FDIC BankFind Suite. For other lenders, ask about their performance history. If they're unable or unwilling to share that information with you, it could be a red flag.

2) Diversification. Maintaining a diversified portfolio of customers and services helps a financial institution buffer downturns in one area with stronger returns in others. Healthy financial partners will show diversification across asset classes—bonds, stocks, Treasury securities and more—as well as industry sectors and geographical areas.

Talk to your potential financial partner about their strategies for managing risk through diversification. If their assets appear to be too heavily invested in one asset class or business sector, or are concentrated in one geopolitical region, it could be a sign that they lack the broad diversification needed for strong, secure operations.

3) High liquidity. A financial institution's liquidity is its ability to meet its financial obligations without experiencing losses. The more liquid a firm's portfolio is, the more easily its investment assets can be converted to cash without lowering their market price significantly. Liquidity provides flexibility to respond to borrowers' needs. A financial partner with high liquidity shouldn't leave you high and dry without the capital you need when you're in the process of closing a deal.

A good way to assess a financial institution's liquidity is to consider its capital-to-assets ratio. Look for a partner with a capital-to-assets ratio at or above the national average for the U.S., which was 8.62% in 2022. Ask questions to gain an understanding of their deposit base. Inquire about the average size of deposits, duration of deposit relationships, percentage of those insured, lending limits and more.

4) Strong borrowing capacity. We usually think of financial institutions as lenders, but to operate they must be able to borrow funds or take in deposits as well. If a bank's borrowers need funds and the bank's liquid assets are not sufficient to meet the immediate demand, the bank must borrow in order to maintain its legally required reserves.

Choosing a financial partner with a strong borrowing capacity can help ensure that your practice will have the funds needed to carry out your expansion or perpetuation plans in a timely manner.

5) Relationship-based, long-term support. Every firm is different, so it is wise to develop a relationship with a financial partner who has the flexibility to respond to your practice's individual circumstances. A strong financial partner will take the long view with clients and can help mitigate short-term challenges when the client's long-term fundamentals are good. Portfolio lenders typically are relationship-based and have more flexibility in their lending decisions. Their ability to react quickly to market changes may allow them to continue lending when other sources of capital may pull back.

While the big banking upheavals of the spring seem to have abated somewhat, many observers still expect turbulence ahead in the financial services sector. Choosing a financial partner wisely can help keep your practice's growth or succession plans on track. Robust past performance, high liquidity, strong borrowing capacity and a focus on relationships and long-term support are factors that point to a healthy and stable financial partner.

Rick Dennen is the founder and CEO of Indianapolis-based Oak Street Funding, a First Financial Bank company, with customized loan products and services for specialty lines of business including certified public accountants, registered investment advisors and insurance agents nationwide.

Thursday, November 2, 2023
Agency Operations & Best Practices