“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 firstname.lastname@example.org or (708) 210-5143.