The latest data from the Federal Deposit Insurance Corp. shows that a permanent shift has occurred in the lending environment. Although overall commercial and industrial lending by banks has increased for five straight quarters, loans to small businesses with $1 million or less in annual revenue have been shrinking since June 2008.
Unless business owners make a concerted effort to understand underwriting requirements and adapt their approach, they will have a hard time securing capital at fair prices.
“Owners can no longer submit a loan package and wait for approval,” says Betty Rengifo Uribe, executive vice president of the Business and Personal Banking Division at California Bank & Trust. “They have to be engaged in the process and breathe life into their numbers, so bankers have enough information to approve their loan.”
Smart Business spoke with Uribe about the changing lending climate and why executives must adapt their strategy to secure a business loan.
How has the lending climate changed?
Bankers have to comply with a host of new regulations and stringent underwriting standards that have permanently shifted the way we consider and grant business loans. We do not rubber stamp applications — we want to hear the story behind the numbers, get to know applicants personally and even tour their facilities. For example, it’s not enough to understand the business and its customers’ needs; bankers need to understand the customers’ customers to validate the revenue projections and ensure the ability to service debt. We want to know how the economy has impacted the industry, how the business has adapted its strategy and why the company will be successful in the future. Of course, having an inside look at the business not only provides loan officers with the confidence to recommend the loan package, but they’re more likely to lobby on the borrower’s behalf when the loan comes up for approval.
What’s the best way to research the market and identify a prospective lender?
Start by researching prospective lenders on the Internet before requesting an appointment with a loan officer. Ask about the banker’s background and experience to ensure that the lender or branch manager has the knowledge, interest and enthusiasm to earnestly evaluate your business request. Move on if a banker seems lackadaisical. Make sure they have the expertise in your industry and can add value to your business. If they have the business expertise, they will be poised to help your business grow.
What should executives bring to the initial meeting?
Provide a framework to support your loan request by bringing an introductory memo or business plan that describes the history of your company, the profiles of your management team, a summary of your capital needs and the purpose for the funds. Also, bring copies of your tax returns covering the last two to three years and perhaps provide the contact information for your CPA or CFO so he or she can answer the loan officer’s questions and validate the efficacy of your financial assumptions.
How do lenders evaluate a borrower’s credit worthiness utilizing the 5 Cs?
Bankers consider these five characteristics to evaluate the creditworthiness of potential borrowers.
? Character: Reviews the owner’s and the company’s reputation as well as the thoroughness of the loan package.
? Capacity: Measures the borrower’s ability to service debt from current cash flow by reviewing a summary of monthly non-discretionary payments. Normally, lenders look for combined personal and business cash outflow to be no more than 40 percent of the cash inflow.
? Capital: Considers the borrower’s equity along with his or her initial investment. Remember, a banker will be more willing to invest alongside borrowers who invest in their own company.
? Collateral: Contemplates secondary sources of repayment should the business struggle financially, such as the ability to liquidate receivables or inventory, stocks and bonds or other assets like real estate.
? Conditions: Examines the industry’s stability, trends, competitive environment as well as other external factors that influence business success, including the overall economy.
What should owners include in their business plan?
It’s fine to use a template as long as your business plan covers the history of your company and provides an in-depth trend analysis covering the last three years. A brief bio of all key management members is always a good idea to include. This shows the lender that you have a solid management team with the expertise to grow your business. Loan officers want to hear about the obstacles you’ve faced and how you’ve overcome them, since resilient and resourceful executives will probably succeed in the future. Finally, provide a financial forecast and describe your plans for the next two years.
Are there other tips that can help owners navigate the lending process and secure a business loan?
Get to know the loan officer, underwriter and branch manager because each one plays an important role in approving your loan. Request a list of required forms and documents and submit everything at once. Don’t raise red flags by omitting answers in the loan application; just insert N/A if the question doesn’t apply. Finally, follow up at every stage of the process to make sure your request is being considered.
Betty Rengifo Uribe is executive vice president for the Business and Personal Banking Division at California Bank & Trust. Call (800) 400-6080 to reach the branch nearest you or visit www.calbanktrust.com to learn more about California Bank & Trust.