Asked and Answered

We asked six local bankers what they seek in a borrower—so you don’t have to

What do bankers want? Those four little words are on the minds of every business owner who needs a loan or line of credit to expand or operate. Upsize asked six local bankers for their answers, and we’ll let them stand as a concise snapshot into the minds of the people who hold the pursestrings. Here’s to opening their wallets for whatever venture you have in mind.

First, the questions:

  • What types of lending to what types of borrowers do you seek?

  • What’s your best piece of advice for borrowers today, so they can get a loan?

  • Name the biggest red flag you see as a banker, on the part of would-be borrowers?

  • And the flip side—what impresses you the most in a borrower, so you say yes to their request?

Now, the answers:

Making a match

“We look at a company’s historical cash flow and their projected cash flow, and we want that to match up with what they’re required to service.”
— Kevin Howk, Crown Bank

What we do here is primarily all small commercial transactions. We do deal with private banking transactions also, so that’s high net worth individuals investing in commercial transactions. We do equipment financing, working capital lines, primarily to businesses with anywhere from 0 up to $50 million in revenue.

We tend to favor manufacturing/wholesale businesses rather than service businesses. I don’t feel like we’re doing anything different from before the recession. We’ve been cash flow focused, and we still are. We’re cash flow lenders, which means we look at a company’s ability to repay a loan.

My advice is, they need to be prepared to explain their cash flow and back up their projections. If their projected cash flows are radically different than what they’ve historically done, there needs to be a good explanation for why it’s changing, that we can find credible.
One of the biggest red flags is when a small-business owner wants to borrow money but doesn’t want to personally guarantee the debt. It’s kind of a policy for us. We want a business owner to stand behind the company.

What impresses me the most is someone who comes in with all that stuff, is organized, and has a plan and how to execute it. How often does that happen? I wish it was more often. I feel like it’s at least half the time. If you have to choose between a well organized person with a plan and someone without, obviously it’s not a hard decision.

All about management

“Our assessment is, constantly, can management execute to do the things they have to do to grow the business and ultimately pay us back?”
— Michael Zenk, Venture Bank

We are a business bank, so 97 percent of what we do is business banking. First off we don’t want to concentrate on any industry. There’s not a business out there we’re not interested in helping. We do working capital loans, for businesses that are growing. We do lots of fixed asset financing.

We’ve done two business acquisition loans already this year, and we met with two prospects yesterday looking at acquisitions. Our customers range from the start-up phase to $30- or $40 million in revenue.

I have the perfect advice: Continually provide your bank with timely professional information and constant communication on your business. Businesses are dynamic, they’re changing all the time. Maybe a business has had a couple of good years and thinks, I don’t need to keep the banker informed.

And now suddenly that owner gets a phone call that a competitor is willing to buy. So now there is a scramble to get the bank up to speed. That’s a big mistake, because you could very well lose that opportunity. Or it could be the other way. It could be, you just lost your biggest customer, and the fact the owner has kept me informed, I could say, that’s not a big issue. Good managers of businesses—the owner or the CEO controls the bank relationship.

The biggest red flag: We stop getting financial information. We start seeing overdrafts and past-dues. For new borrowers, they either don’t have professionally prepared financial information or they don’t understand it.

Here’s what we lend on. Entrepreneurs, business owners think the bank’s going to lend on collateral or cash flow or current ratio or debt-equity ratio. What we lend on every day is three things: management, management, management. Management is what pays us back ultimately, so that’s the most important part of our assessment.

Thinking ahead

“Everybody has times when their cash flow is short, but the most successful business people will be able to anticipate those times and be resourceful enough to provide for that.”
— Brad Huckle, North American Banking Co.

We make commercial and industrial loans, loans to entrepreneurs and professionals, and loans for owner-occupied real estate to investors. For entrepreneurs, that includes complicated transactions where financing is needed to bridge the gap in a transaction, maybe to get a company from point A to point B so something else can happen.

There are some companies that are struggling, and we get some shorter-term mezzanine finance involved. It might be acquisitions, it might be taking opportunities to refinance at a discount, it might be that somebody is in foreclosure and needs to get short-term financing to get the time to properly market their property so they don’t just lose their equity. These are real-world things, they do happen. We provide the funding in between somebody who has a problem and somebody who can offer a solution.

My best piece of advice is to be prepared for more communication and increased requests for information, than in the past. Banks are expected to be able to have enough information to properly underwrite the consolidated cash flow of a given borrower. In the old days somebody might want to borrow money on a piece of commercial real estate and the bank would just ask for financial statements on the apartment building, for example.

What we found out was, if that same borrower had three other buildings that were bleeding, the reality is, the individual on a consolidated basis might not have sufficient capital. That’s why more information is being requested by banks.

My biggest red flag is past-due loans. People who have past due loans might in general be more comfortable with being highly leveraged and holding on to their non-critical assets longer than someone who anticipates their cash flow needs.

What impresses me about borrowers? Demonstrated character, and there’s a variety of ways that bankers look at that. Some people might have a gut reaction, some people might look to civic organizations that a business owner might be committed to. Who are the people the borrower knows and does business with, and do those people have demonstrated character as well?

Beyond the handshake

“Someone who has challenges managing their personal financial world, it gives me pause.”
— Terri Fleming, Western Bank

We are actively seeking commercial real estate owner-occupied, commercial real estate investment, operating lines of credit to operating businesses, equipment financing, and at Western I am heading up an initiative around SBA programs. We have a broad range of existing clients. We haven’t specialized by industry type; that’s part of what keeps us diverse in our concentrations, which keeps the regulators happy, too.

My best advice is be prepared to explain in a concise fashion your business model and sources of cash flow. Bankers are highly focused on cash flow, which is what repays loans, and far more focused on cash flow than we are on collateral compared to the past.

Poor personal credit is a red flag, because I believe that history has a tendency to repeat itself. One of the things that has come out of tough economic times and is driven by the regulators is looking at the global financial situation. We look at the personal situation, and other investments, to see are there financial pressures from a related entity or from a personal situation that could affect the ability to repay. In a small, closely held business that is key, understanding the whole picture.

What impresses me? Someone who can present a fairly complete financial picture about their request without a lot of probing. Somebody who understands the components of what we need to make a decision. Someone who understands their business cycle and their cash flow. Bankers can’t operate any more under the idea, trust me it will be fine. There are a lot of things that we used to do on a handshake.

Unfortunately it almost feels like you’re not being trusted as the borrower. So as the banker it’s a challenge to communicate what we need without saying there’s not trust there.

What’s the backup plan?

“The next thing to demonstrate is how the loan would be repaid if your plan doesn’t work. So it’s kind of your Plan B.”
— Paul Flood, Bremer Bank

We see just about everything under the sun. We’ve seen a rebound in the service sector, retail, manufacturing, wholesale, professional services, and we continue to see growth in all areas. It’s broad-based.

If I were giving advice to anybody going in to sit down with a banker—be prepared to demonstrate to the lender how the loan is going to be repaid, whether it’s through existing cash flow or a forecast through a business plan. The owner has to put their time into explaining to the lender why the numbers make sense.

Is it because your existing operation is at full capacity and your customers are requesting more? Is it because there’s something specific about your product that is getting a very positive response in the market? Is there a difference in technology? We’ll very often get a spreadsheet of numbers, and the first thing the lender will do is drill down into what the numbers mean.

A red flag is the inability to be able to speak directly to the thoughts they put into preparing their loan request or business plan. If I’m not sure where the cash flow numbers came from—if they just put them into the computer and that’s what came up. The other is lack of industry specific experience.

For example, it’s very easy for me as a banker and a bank manager to think I can manage a convenience store. That seems pretty easy, but I have no idea what that business is about. A red flag is when somebody has a lack of industry experience but is looking to jump with both feet into it.

And the flip side? Somebody that comes to me who’s done their homework and thought through things. Here’s my plan, and if my plan doesn’t work here’s my plan B, and I have the industry experience to work the plan and pay the loan back.

Rolling with the times

“It’s good to see a company that can adapt with its environment and scale down expenses to match the scaled-down revenue.”
— Michael Strub, VisionBank

We focus on business lending and it’s all types: manufacturing, service, real estate investors. We don’t shut the door on anybody. We’re seeing quite a bit of real estate actually. We are seeing some startups, which is a good sign. We’re using SBA for real estate and startups. We’re on an aggressive path.

My best advice is to be honest. The character piece of lending is still a very big deal with VisionBank. Be prepared to provide financials and documentation. It’s not always necessarily needed in the first meeting, but if it goes to a credit report stage we always trust but verify. And start early. Steps in the process do take time.

A red flag is equity, or lack of it. If somebody wants to do 100 percent financing, and we see a pattern of the owner taking 100 percent equity out in distributions, that’s a red flag.

With everything that’s happened over the last eight years, we’ve seen a lot of companies take their hits. Those companies that have adjusted to the economic environment, made their changes, stuck through, maybe even funded their companies with their personal assets—those are impressive.

Beth Ewen