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 [email protected].