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| Loan Financing Guide for Small Business Owners A guide to securing and repaying business loans |
| Your character is the key to securing business loans - back to square one. |
A few weeks ago I was speaking with a senior lending officer of a
Boston bank. He said something that I hear more and more often
from commercial lenders. He pointed out that “at the end of the
day loan approval is based on the business owner’s or manager’s
character.” By character I am not talking about your character
traits such as sense of humor, industriousness, or optimism. I am
talking about your integrity. This quality is what will help ensure
loan repayment and is the key to loan approval in the first place. It
is also a part of the five C’s of credit (Character, Capacity,
Capital, Collateral, and Conditions), guiding principals used in
reviewing loan requests.* Although we, bankers, tend to think that
character is a crucial element in loan decision for small and mid-
size privately-owned companies (loosely defined as companies
with revenues up to about $30 million), I can make an argument
that it is just as important for large public companies, especially in
light of recent fraud and financial scandals.
Before presenting examples of behavior lenders look for, it is
important to mention the full circle the lending environment has
made over the last 100 years. From loan sharking and loans
available to a group of a privileged few, commercial loans
gradually became available to wider circles of small business
entrepreneurs. The focus shifted to who is really behind the
company – its owners and key executives. In the 1980s and
1990s, financial analysis methods have somewhat replaced the
importance of assessing the owners’ character by numbers’
crunching. As we are entering the new century, we, lenders, are
realizing more and more that financial analysis does not exist in a
vacuum. It is the business owners and key managers who direct
their companies in producing cash and are ultimately responsible
for loan repayment.
So what are the ways you can demonstrate that your character has
the right prerequisites for loan approval? Character qualities can be
manifested in certain types of behavior lenders particularly look for.
Formal descriptors of your character:**
Informal descriptors:**
It is helpful to see owners who are rooted in local community;
especially for small business loan applicants (some large
commercial banks define small business loan relationships as
relationships with $10 or even $20 million in total loans). This
means that you are likely to have a verifiable track-record and
reputation in the community and will be compelled to preserve
your reputation among lenders and other business partners. In
addition, it serves almost as an insurance policy that you will not
abandon your loan obligations during difficult times and relocate.
Conclusion
I hope this article gives you an idea of what lenders look for in
prospective business borrowers. While it is not always easy to
establish whether you have the right character to ensure loan
approval, there are ways to estimate whether you are
creditworthy. I recall a loan request that had almost everything a
commercial lender looks for: strong cash flow, sufficient collateral,
and management’s experience in the industry. Nonetheless, it was
turned down at the eleventh hour because one of the approving
officers recognized the name of the company’s owner. Apparently
that businessman has defaulted and walked away on a loan
obligation to that loan officer’s former bank. While business
failures and loan defaults do happen from time to time (even to
those business owners who fight hard for their businesses’ survival
and ultimate loan repayment), it also counts how you have handled
your lending relationship during the difficult times. Lenders do not
own the money they lend to you. It is the money of their
depositors. This is why they work hard to ensure prompt loan
repayment.
Characters of the business owner and key executives will continue
to play an increasingly important role in your business’ ability to
secure loans. Lenders’ lack of confidence in your character can be
that one and the only reason for a loan request to be turned down,
even if all other desired qualities are present.
Footnotes:
* The discussion of the C’s of credit is beyond the scope of this article. However,
there is plenty of information covering this subject, including a detailed discussion
in Chapter 17 of my book.
** Formal and Informal are the terms used by the author.
Boston bank. He said something that I hear more and more often
from commercial lenders. He pointed out that “at the end of the
day loan approval is based on the business owner’s or manager’s
character.” By character I am not talking about your character
traits such as sense of humor, industriousness, or optimism. I am
talking about your integrity. This quality is what will help ensure
loan repayment and is the key to loan approval in the first place. It
is also a part of the five C’s of credit (Character, Capacity,
Capital, Collateral, and Conditions), guiding principals used in
reviewing loan requests.* Although we, bankers, tend to think that
character is a crucial element in loan decision for small and mid-
size privately-owned companies (loosely defined as companies
with revenues up to about $30 million), I can make an argument
that it is just as important for large public companies, especially in
light of recent fraud and financial scandals.
Before presenting examples of behavior lenders look for, it is
important to mention the full circle the lending environment has
made over the last 100 years. From loan sharking and loans
available to a group of a privileged few, commercial loans
gradually became available to wider circles of small business
entrepreneurs. The focus shifted to who is really behind the
company – its owners and key executives. In the 1980s and
1990s, financial analysis methods have somewhat replaced the
importance of assessing the owners’ character by numbers’
crunching. As we are entering the new century, we, lenders, are
realizing more and more that financial analysis does not exist in a
vacuum. It is the business owners and key managers who direct
their companies in producing cash and are ultimately responsible
for loan repayment.
So what are the ways you can demonstrate that your character has
the right prerequisites for loan approval? Character qualities can be
manifested in certain types of behavior lenders particularly look for.
Formal descriptors of your character:**
- Credit bureaus capture your personal and business
credit history and are reliable enough tools to predict
your likely future behavior and commitment to repaying
your business loans. For example, timely loan payments
and payments to your suppliers and other creditors, absence
of tax liens and delinquencies, absence of charge-offs, and
moderate usage of debt are some of the ways to
demonstrate your creditworthiness. - Written or verbal references provided by your business
partners, associates, customers, suppliers, and other
parties. When you apply for a business loan with a new
lending institution, obtaining references is a normal practice
to establish your and your company’s creditworthiness; it is
actually a requirement at most lending institutions. One
suggestion -- ensure that the parties you offer as your
references know you well and are willing to vouch for you
as well as are aware that lenders will be contacting them. In
addition, it is important that your references are from
credible sources, not your friends or family members or
people who have bad reputation in the business community
(e.g. known for being dishonest or unethical in business
affairs).
Informal descriptors:**
- Your (unwritten) reputation in the business community.
Informal description of your character is not as easy to
pinpoint. Know this – you have certain reputation in the
business community, whether you want it or not. Unlike
formal references, this is something your competitors,
customers, suppliers, business associates, and many others
say behind your back. Everything is in your control though.
Treat people right and your reputation will serve you well
when applying for loans. - Evidence of how you have handled your credit
obligations in the past, especially in the times of trouble.
This is a tricky one. My best description is prompt payment
or eventual debt repayment even when your business is
experiencing financial problems, including bankruptcy cases.
This shows that even in spite of some difficult predicaments
you did not stiff your lenders and made good on your
promise to repay loans. For example, a business customer
of my bank has run into cash flow problems with her
business and almost went out of business. However, she has
worked with the bank every step of the way by keeping it
informed of what was happening with the company. That
individual was eventually able to restructure the entire loan
package so that the bank did not lose a penny. Given a
viable loan proposal in the future, the bank will have
confidence in lending to that businesswoman and her
company based on the past experience with her.
It is helpful to see owners who are rooted in local community;
especially for small business loan applicants (some large
commercial banks define small business loan relationships as
relationships with $10 or even $20 million in total loans). This
means that you are likely to have a verifiable track-record and
reputation in the community and will be compelled to preserve
your reputation among lenders and other business partners. In
addition, it serves almost as an insurance policy that you will not
abandon your loan obligations during difficult times and relocate.
Conclusion
I hope this article gives you an idea of what lenders look for in
prospective business borrowers. While it is not always easy to
establish whether you have the right character to ensure loan
approval, there are ways to estimate whether you are
creditworthy. I recall a loan request that had almost everything a
commercial lender looks for: strong cash flow, sufficient collateral,
and management’s experience in the industry. Nonetheless, it was
turned down at the eleventh hour because one of the approving
officers recognized the name of the company’s owner. Apparently
that businessman has defaulted and walked away on a loan
obligation to that loan officer’s former bank. While business
failures and loan defaults do happen from time to time (even to
those business owners who fight hard for their businesses’ survival
and ultimate loan repayment), it also counts how you have handled
your lending relationship during the difficult times. Lenders do not
own the money they lend to you. It is the money of their
depositors. This is why they work hard to ensure prompt loan
repayment.
Characters of the business owner and key executives will continue
to play an increasingly important role in your business’ ability to
secure loans. Lenders’ lack of confidence in your character can be
that one and the only reason for a loan request to be turned down,
even if all other desired qualities are present.
Footnotes:
* The discussion of the C’s of credit is beyond the scope of this article. However,
there is plenty of information covering this subject, including a detailed discussion
in Chapter 17 of my book.
** Formal and Informal are the terms used by the author.
| Copyright © 2005-2009. D. Neil Berdiev. All rights reserved. |