Banks are looking for more than financial data when they make credit decisions. What they’re really looking for is information about the business: its operations, competitive climate and how the
credit would help the business grow.
Improving the quality of this information
improves the chance of success and expedites the credit process.
“If the business has all the information
together that the bank needs, it can get a
credit decision in one to two weeks,” says
Tom Marvinac, group regional president
for commercial banking at MB Financial
Bank. “As long as the business is able to
provide the information and have key people available to answer questions, it should
expect a prompt decision. One way to evaluate lenders is to consider their decision-making time and whether the business can
get quick access to senior managers.”
Smart Business spoke with Marvinac to
learn what information businesses need
and how they can present it to increase
their chances of getting commercial credit.
What are the main steps in the commercial
credit application process?
For new customers with no prior relationship with the bank, it begins with a discussion so the banker can get an understanding of the business and industry. The
banker will want to learn about trends
affecting the business, the competitive situation and get to know some of the key
people in the company, such as the head of
sales or the controller, if these people
aren’t the owners or principals.
Often the banker will visit the business to
get a better feel for the operations and people. After that, the bank will want to see
financial information.
What can businesses do to expedite the
process?
The most important thing is to have information ready and qualified personnel available to answer questions and discuss business issues. The financial information
doesn’t always tell the whole story. Maybe
a company has just had a record year, but it included a large contract that won’t be
recurring or the company gave a substantial discount to keep a key customer from
going to a competitor, but the margins
should rebound the next year. This is the
type of information that goes into the commercial credit decision, and it shows why it
is important for the banker to understand
the customer’s business and industry.
What specific information should businesses
provide?
A company with no previous relationship
with the bank should present two or three
years of financial information, such as
income statements, balance sheets or perhaps tax returns, depending on how the
business is organized and the complexity
of its financials. Companies should be prepared to discuss anything unusual that’s
occurred in the business — good or bad —
to help frame the financials and put the
numbers into some context.
Companies may need to get their outside
accountants involved. It is very helpful and
saves time in the lending process if they
give their accountants permission to speak
to the bank directly. From a banker’s point
of view, it would be very difficult for a business to over prepare. Err on the side of
preparation.
What information is typically most difficult
for companies to provide?
To issue commercial credit, the bank
wants to know how the money will help
the company. Businesses usually know the
answer, but often have a hard time
expressing it. Something a bank would
love to get is a projection or pro forma
showing what the capital would do for the
business. The bank should have the business knowledge to help the customer
develop these projections, and outside
accountants may be involved, too.
Aside from credit risk, what are the leading
reasons commercial credit requests are
rejected?
Companies can overestimate the impact
of getting bigger. For example, they may
want to borrow to get a bigger, better
machine that will significantly improve
their output capacity. But realistically, they
might not have steady demand for the
excess capacity, which makes the machine
a very expensive piece of capital equipment. Another example is borrowing to
expand a facility or add new locations;
sometimes expansion will make a company larger, but no more profitable.
The big issue is that companies may not
have enough equity capital to grow. It is
very difficult to grow a business solely on
debt. Young companies often want to
expand, but they may need to develop
more equity in the business before expansion makes sense.
TOM MARVINAC is group regional president for commercial
banking at MB Financial Bank and has more than 25 years of
industry experience. MB Financial Bank offers a wide range of
commercial banking, business banking, treasury management, personal banking and wealth management services. Reach
Marvinac at [email protected] or (708) 210-5143.
