Understanding Bankers: Basic Rules to Boost Your Odds of Getting a Loan
Back in 1981, with the prime borrowing rate at an all-time high of 21 percent, most bank customers felt that those cameras they have in banks to photograph robbers should, in all fairness, be pointed at the "real" crooks: the lending officers. At such rates most companies found it difficult (if not impossible) to borrow money. Actually, it wasn't so hard to borrow money--it's just that no one could repay it.
Those days of exorbitant interest rates are gone now, at least for the time being. In fact, interest rates are at all-time lows. However, the problems of finding capital and repaying loans remain, and many business owners have feelings of animosity and bitterness toward banks and bankers as a result of their bad experiences. For just a moment, let's redefine the Golden Rule: Those who have the gold, make the rules.
Let's also take a look at the recent past. The economic firestorm of the past three years has changed the credit landscape going forward. First, let's look at the primary components of the recent financial meltdown: 1) a lax regulatory environment creating conditions for abuse, 2) substandard credit policies and documentation, 3) economic over-optimism, and 4) borrowers' lack of financial acumen.
In the bank regulatory arena, lax enforcement has been replaced by an overly restrictive review process applied in an arbitrary manner that is actually hindering the recovery. Banks are scrambling to refocus on credit training and loan documentation.
Finally, there's the issue of the lack of financial acumen on the part of business owners and managers. For decades, everyone has known, and accepted, the classic profile: Most business owners know how to make it and sell it, while the financial side of the business remains somewhat of a mystery. This folklore profile will no longer cut it in today's overzealous documentation environment. Business owners will be expected to "up their game" with regard to financial acumen and business performance.
Keep in mind that borrowing and lending represent two sides of the same coin. No business relationship works out unless you have a win-win situation. This includes banking. In fact, most bad experiences and loan rejections are the result of poor communication and lack of education: the banker's lack of education about your business, and your lack of education about the bank's procedures, policies, and constraints.
This mutual lack of education breeds misunderstanding, mistrust, and frustration. Ted Frost, in his book Where Have All the Woolly Mammoths Gone? puts it this way: "I've often thought if I could collect all the nation's bankers in a big gunny sack out in the middle of the ocean, that I would jump overboard with the sack and sacrifice myself just to rid the world of them."
Know thy banker
It doesn't need to be that way. Let us share some thoughts from the perspective of someone who's been both a banker and a business owner. Since it usually aids in understanding to view any situation through the other person's eyes, let's examine where your banker is coming from.
The best way for banks (and bankers) to be successful is to lend money to businesses that pay them back. But 80 percent of all businesses fail. So bankers tend to be very cautious because they have a 4 out of 5 chance of guessing wrong--and that 80 percent statistic was in good times.
To make matters worse, most business owners don't understand leverage or why more debt equals more risk... and they tend to overstate their optimism and understate their need for capital... and they're usually undercapitalized and overextended... and they rarely have accurate, timely information. But they do have an almost religious belief that things will be all right if they can just get the funds they need to "get over the hump." Sound familiar?
Of course, borrowing is a two-way street. It's not just a case of business owners needing bankers; bankers need their business customers just as much. For banks, their deposits are liabilities (as in "demand deposit" accounts). Banks don't make any money until they make a loan. Find a banker who's never made a bad loan and we'll show you a bad banker. On the other hand, show us a banker who's made too many bad loans and we'll show you someone who now has a different career. (The classic advice story for young bankers who want to be successful is: "Make good loans." How do you know if a loan is good or not? "Experience." How do you get experience? "Bad loans.")
One of the things many bankers also discover is that the way to get ahead is not by doing good things, but rather by not doing bad things. Thus, the easiest thing to say is "No." Bankers can become skeptics, so it becomes the business owner's job to give them a reason to say "Yes."
What you can do
With these realities in mind, let's examine some of the things you can do to strengthen your banking relationship and increase your "bankability." Banks generally evaluate your loan request using the "five C's" of credit:
- Character: You must be trustworthy and have a good name; otherwise how good the deal is won't matter.
- Capital: Don't look for 100 percent financing; expect to invest some funds yourself (skin in the game).
- Collateral: What assets are available as a secondary source of repayment (just in case)?
- Capacity: You must understand your company's ability to absorb and repay debt (financial skills).
- Conditions: What are the general economic conditions, and in what ways will they affect your industry and your company (shaky recovery)?
Since the bank really depends almost entirely on you, the more you look like you know what you're doing, the better off you are. Coupling this knowledge with an understanding of the way banks operate can create a winning combination in getting what you need at the bank.
To test whether or not you're adequately prepared, always ask yourself the following five questions, the ones most bankers want answered before they'll lend anybody anything:
- How much do you need?
- What will you do with it?
- When will you pay it back?
- How will you pay it back (i.e., what will make cash flow)?
- What if something goes wrong?
If you can answer all of these questions, you're ready.
Then keep in mind the old Boy Scout motto: Be prepared. And be mindful of the advice from a senior credit manager at one of the larger Midwest banks: 1) keep in mind that borrowing is a privilege, not a right, and 2) know your numbers or stay home!
Steve LeFever is Chair of Business Resource Services (BRS), where he guides business networks from "Profit Mystery" to "Profit Mastery." For more than 10 years, franchisors and franchisees have improved their financial performance by following the BRS Profit Mastery process: financial training, performance benchmarking, and accountability/bankability modeling. Contact BRS at 800-488-3520 x14 or firstname.lastname@example.org.
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