5 Questions to Ask Before Selecting a Financial Institution for Your Legal Tech Startup
A version of this article first appeared in the April 13,2023 issue of Legal Tech News.
The recent banking tragedies with Silicon Valley Bank, Credit Suisse and First Republic sparked a fury of news and articles about what went wrong and how it impacted financial markets. It caused many entrepreneurs and investors deep anxiety, with legal tech startups being no exception.
It is understandable you might be concerned about steps you can take to identify the correct financial institution for your company. As a business owner, you deserve the peace of mind that your assets are being managed responsibly. Let’s take a look at five questions to ask - besides the usual considerations like interest rates, balance requirements, monthly charges, and other specific business needs - when zeroing on the right financial institution for your legal tech startup.
1. What are your company’s current and long-term needs?
The first thing to reflect on when evaluating different financial institutions is your business’ exact needs. Some legaltech companies might need a small business loan, whereas some may need assistance with payroll processing, and others might need a financial advisor to work through complex financial issues. Knowing what your specific requirements are will help you find the perfect match. Furthermore, do not just focus on your immediate needs - also consider what sort of needs your business will have in the future, especially as you expand. Do the due diligence of evaluating if the bank you are considering can meet both your brand’s immediate and long-term requirements for a smooth relationship that stands the test of time.
2. Does the bank specialize in dealing with businesses in the legaltech space?
Besides evaluating the unique selling points (USPs) each bank is offering, it is important to also evaluate whether or not they have a track record working with other companies in the same industry. The pandemic and recession have led to economic uncertainty, and this impacts each industry in nuanced ways, such as demand shifts, the need to roll out updated pricing / payment terms for clients and more. A bank that understands these aspects thoroughly will be able to guide you more effectively in navigating uncertain times and working toward expansion.
3. What sort of risk mitigation processes are in place?
In SVB’s case, it is estimated that 95% of deposits were uninsured (most of their clientele included startups and venture capitalists). Besides considering the financial stability of the bank in the past, also find out how they mitigate potential risks. Additionally, assess how transparent the bank is in its approach toward managing investments and maintaining communication.
4. Do you see merit in using multiple banks parallel?
According to the Federal Deposit Insurance Company, smaller banks account for nearly 54% of loans to small businesses. They may even offer better one-on-one working relationships. However, larger banks often offer lower interest rates on loans. You may want to consider tapping into different banks for different needs. While this requires robust internal accounting processes (perhaps a part-time CFO), there are advantages to not putting all your eggs in one basket.
5. Do you know any other startup owners who can share their experience?
There is great value in talking to other legaltech startup owners about their first-hand experience with various banks, including certain fine print like penalties, minimum balance, repayment terms that caught them by surprise that you should be mindful of in the start. In fact, this approach might be more helpful rather than scrolling mindlessly through endless reviews online, many of which might be too vague to be relevant.
As your business continues to grow, its financial needs may change; likewise, as your bank modifies its services, it may have implications on your startup (i.e. increased loan interest rates, change in customer service quality or revised finance charges). Keep yourself abreast on the options available regularly to make sure you’re in safe, effective and stress-free hands. Ultimately, a solid financial institution will be a close partner to your business, not just for loans to grow, but to establish credibility surrounding your startup’s stability in front of stakeholders.