What Bankers Really Want

Ever wonder how bankers decide whether you can borrow money? Commercial lenders perform due diligence to understand your business, the industry you operate in, and your financial capacity. This is the logical “science” part of the loan decision process. But there is an "art" to the commercial lending process too.

 Five general areas that commercial lenders consider when making a loan decision are:
• Character: It’s all about you. Your past reputation with vendors, creditors and community.
• Capacity: Does your business have cash flow to pay debt? Historical and/or projected income? 
• Capital: How much cash have you or others invested into your business?
• Collateral: What tangible assets can be pledged to cover your loan request?
 • Conditions: What is happening in your industry? Overall economy? What are the risks?

 Of these five areas, four represent the logical part of loan decision-making. Determining one’s character comes with practice and experience and is somewhat of an “art”. It is also one of the most important factors. Your character signals the likelihood of loan repayment.

Years ago, when I was a young lender, an older more-experienced banker told me “Character is like tea. You don’t know how strong it is until you put it in hot water”. His comment has proven true over time. As a business owner, there are steps you can take to get a timely loan decision. 

Commercial bankers analyze documents such as financial statements, tax returns, credit report, business plan, projections, customer list, etc. So when seeking a loan, provide that information to your banker as quickly as possible. And if your banker has questions be sure to get the answers right away. Following up is also a good idea.

Keeping open lines of communication are critical during the loan application and decision process. If you struggle with bookkeeping or accounting, it is a good idea to hire a CPA to help get your financial records in order before applying for a business loan. Poorly prepared financial statements send a message to your banker that your management skills are lacking. Don’t begin on the wrong foot.

 If you are starting a business, you’ll need a well-thought-out business plan and financial projections. There are several free or low-cost resources in the Treasure Valley that can help you. Showing up with a well-prepared loan package sends a message to your banker that you are a savvy business owner.

While performing the “logical” financial due diligence, your commercial lender is also forming an opinion about you and your business. We ask questions and listen to your answers. We observe your business operation and facility. We may talk with others who know you or have worked with you in some capacity. We check public records and your credit report to review your past behavior with creditors and others.

If you have experienced something unfortunate in your past and you are seeking funding, please tell your banker about it. We will find out eventually and it is always best for you to tell the story to us first. That will go a long way to build trust. And as the old saying goes, “people do business with those they know, like and trust”.

What has been your experience in getting a business loan? What’s the best advice you’ve received? What resources did you use?

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