The higher rewards that business ownership often promises and the yearning that many have to run their own companies have motivated thousands of Americans to join the ranks of the self-employed.
As their numbers rise, the growth of small businesses is critical to the lending business. The banks’ goal: help local businesses thrive while ensuring that depositor’s assets are safeguarded in well-run and prudent investments. Too often, however, the small business owner does not understand how to secure the credit needed to jump-start or sustain his operation.
“It comes down to understanding what a lender is looking for: the tools that he needs to make a risk assessment decision,” says Frank Briggs, senior vice president and manager of business banking at ViewPoint Bank.
Smart Business spoke with Briggs about some of the do’s and don’ts of commercial borrowing and how to obtain the right loan at the right price.
Is getting a commercial loan as simple as filling out a loan application?
That’s one part of it. Remember, banks are competitive in their desire to establish credit for their clientele, yet so many customers fail to understand what a lender is looking for.
The biggest issue is being able to demonstrate that you already have good credit. Paramount in a person’s ability to get business credit is the strength of his or her individual credit score, which is a great measure of an ability to repay a business loan.
In most owner-managed companies, the owner manages the cash flow of the business. Of course, we look at a company’s revenue, its accounts receivable, marketing strategy and other elements of the operation to determine the strength of the business.
But we also look at how the owner-manager manages the cash flow in his personal life. Does he pay his bills on time and in full? Does he live within his means? Such factors are great indicators of how well he might run his own business. If the history of performance on the personal side is satisfactory, then we look at the business’s trends in revenue, profitability and debt to equity.
How could a person who knows how to run a business not understand the elements of securing credit?
Many business owners know the nuts and bolts of their industry but are not trained in banking.
You could say that there is an entire spectrum of knowledge on how best to secure credit. Some are extremely knowledgeable about available sources of funds and how to qualify. But others are so busy concentrating on their business that they have not gained the tools to understand a lender’s mindset. A simple example is a case in which a client approaches us for a line of credit a term he hears frequently at social gatherings, in advertisements and from his business peers. But even after counseling, he realizes that an equipment loan to buy a delivery truck is necessary. What we do is to uncover the true purpose of the need and direct a customer to the right facility, often at better rates and terms than he originally figured.
What are some of the key elements of an application package?
We look for three things: the credit history of the owner, the cash flow sufficiency of the business and collateral sufficiency or a secondary source of repayment, such as internal capital (including the owner’s personal assets) that would allow for the liquidation of the business in a downturn and make the bank whole.
Many borrowers don’t understand that the bank is lending its depositors’ money and that we need to be certain to minimize risk in order to protect our depositors’ funds.
What are some common mistakes made in loan applications?
An area that borrowers fail to address most commonly is the understanding of historical cash flow. They do not identify all their repayment sources. This could include depreciation a noncash expense excess personal income and excess personal income from other company owners. We help the client identify all sources of repayment in order to strengthen his application.
How does the loan application process begin?
It starts with an interview. But even before that stage, we reach out to the community to target existing customers and new prospects to see if there is a need we can satisfy. It could be that we discover that their borrowing expenses are too high, and that our products could help lower their financing costs.
FRANK BRIGGS is the senior vice president and manager of business banking at ViewPoint Bank. Reach him at (972) 801-5729 or firstname.lastname@example.org.