AFTER A BANKER confirms there is enough cash flow to run your business and adequate collateral to justify a loan, other hurdles remain. Before lending money to your business, the banker will check into the type of person you are, make a judgment on your ability to manage the company and analyze your credit.
Your character: Once it appears a loan is feasible, the banker looks at you. There are two truths in life: you will always judge other people and other people will always judge you. The banker first makes a "gut" decision as to the type of person you are. When times are difficult in the business, will you try to walk away from it? Or do you seem like a hard working executive who will try everything to meet your obligations? More than anything else, your reputation can be the deciding factor in the extension of a loan to your business, especially when the direction of the economy is uncertain.
The banker will use formal and informal ways to make these determinations. The most direct is the lender's personal contact with you during meetings or telephone conversations. In an effort to look beyond a simple credit report on you or your business, the lender is likely to talk to your creditors, business associates or mutual acquaintances. The lender wants to gain a sense of how you handle your business activities. A reputation for being difficult when working with creditors or any taint of dishonesty can be a "deal killer."
Management: The banker will examine your ability to manage the business activity. If your business is relatively small, such as a shoe repair shop, the lender will discuss your own skills. If you have a nationwide network of sales representatives and an additional 20 employees at the home office in Baltimore, the banker will want to see a skilled management team. The lender may also want to see a contingency plan should you need to replace key management people.
Credit: The bank checks your credit background. This will include the credit history for the business and possibly for you personally. For the business, the bank will purchase a Dun & Bradstreet report. D&B is a company that asks business owners to voluntarily submit financial and management information, which D&B then uses for its reports. D&B also contacts creditors to discover how promptly a business pays its bills. The bank looks at this report to find out if the business habitually pays its debts on time or very slowly.
The bank follows a similar process on your personal credit activities. In both cases the lender also looks for past personal or business bankruptcies.
If you currently bank elsewhere, the lender will call the other bank to determine if there have been any problems. The lender will want to know how much you have on deposit in either checking or savings accounts. Naturally, the bank will ask you to open a new account.
Once all of the information is gathered along with your business plan and current financial statements, the next step is a credit analysis. The bank will compare your business's recent financial history, and/or projections, with the financial information of similar companies in your specific industry. If your numbers are significantly different from the industry's -- either better or worse -- the lender will want to understand how the variance occurred.
Rejection: If your loan application is rejected by one bank because the lender considers the loan to be a little too risky, do not panic. A loan proposal that almost qualifies at one bank is likely to find a home elsewhere eventually. Understanding the differences among banks and their loan portfolios will help you decide which one to approach.
The numerous advertisements by various banks promoting their checking and savings services make them seem almost identical. In the area of lending, however, each bank is different.
The bank's loans as a group make up its loan portfolio. As a major source of income, the portfolio must be carefully managed. The interest rate on relatively low-risk loans is generally around the prime rate. On the other hand, relatively high-risk loans yield interest income 2 to 3 percentage points above the prime. Each bank must walk the tightrope between maintenance of a moderate risk level and the realization of the bank's income goals for the year.
If your loan application has been rejected by one bank, you may be able to find another bank that is interested in increasing its income level. It will make a riskier loan in order to charge a higher rate.
In choosing a bank, keep in mind that a banker can be a "no cost consultant" for the business. James Stewart, an assistant vice president with The Bank of Maryland, advises businesses to build a relationship with an "experienced lender who will give you more than a simple yes or no concerning your loan application."
If you need a bank which offers a variety of financial services, a large bank will suit you. If you need more personal service contact, search for those banks that are actively soliciting small business loan activity. The key, regardless of the bank's size, is how much time your banker takes to learn about your business. The lender's knowledge of your business may be the only support available for a new loan at some future critical stage.
The Bottom Line: Bank lending is a "people" business. Both you and the lender must examine one another carefully before any loan contract is signed.
Patrick Rossello, president of The Business Consulting Group, is E a member of a number of local advisory boards including the
Baltimore Economic Development Corp. Send questions or 7 suggested topics to him c/o Money At Work, The Evening Sun,
501 N. Calvert St., Baltimore, Md. 21278.