It's a lot easier to look for a good loan officer if you understand how loan officers look at you.
A friend recently observed that bankers are people that everyone loves to hate. He then proceeded to tell me about the banker with one glass eye . . . you could tell which eye it was -- the one with compassion. Having been a banker for 13 years and a bank regulator for one, I can't say I was surprised at his story. Still, if you could put aside your urge to hate for a while, I'd like to tell you about the view from the other side of the desk.
To begin with, we bankers are not all alike. Some of us will do better for your business than others, which is why you should shop around. Most loan officers are doing what their losses want done so they can get a raise and a promotion. (Banks are notorious for giving the latter in place of the former.) They enjoy saying yes to loan proposals, but they also fear making bad loans. At the very least, bad loans will affect chances of promotion; at the worst, they can get a loan officer fired. It's no accident that bankers are risk averse.
Frequently, your proposals will be viewed in light of where a loan officer is sitting on a particular day -- along the spectrum between the ecstasy of saying yes and the agony of a recent loan loss. One of the best bankers I know, for example, is absolutely the person you would want to approach about most loan propositions. He is honest, consistent, trustworthy, smart, and willing to meet with you anytime. If you want a restaurant loan, however, he is the wrong person to see. He was burned early in his career by a large loss on a restaurant. When Joe Businessman comes in to him and says, "I want to talk to you about a restaurant loan," he might as well say he'd like to talk about rape, incest, spiders, and taxes.
So, in your scouting around, it is important for you to get to know what businesses prospective loan officers like and what they dislike. This is not difficult to do -- just ask about their best and worst lending experiences. They won't give you names, but they'll probably tell you all you need to know. You'll also want to know what they have done successfully in the past, not only because they are likely to look favorably on a similar proposal today, but also because the expertise gained from a successful venture in your industry can be invaluable to you.
Among other key qualifications for you to consider are the following:
* Is your loan officer someone you can consistently count on?
As Mark Twain said, there are bankers who will loan you an umbrella when the sun is shining and then want it back when the rains come. There are solid, consistent, trustworthy bankers, and there are bankers who don't even have a compassionate glass eye. Ask around to see how different bankers treat people who have run into trouble.
In terms of reliability, you'll also want to know your banker's job history. Even if you think a loan officer would be wonderful to work with, one who is merely touching down at this job en route to greener pastures will probably not be there when you need help. It's better to have a reliable workhorse than a racehorse who is here today and gone tomorrow.
* Does your loan officer have the authority to approve your loan or the influence to get it approved?
All loan officers have specific lending authority or loan limits, and within those limits, they can approve a loan right away. If a request exceeds that authority, the loan officer will have to go to a more senior officer or to the loan committee. It's important that your loan officer either has the authority to decide or the influence to get affirmative decisions from higher up.
Of course, it would be nice if everybody could deal with a senior officer, but that's not always possible. You can, however, be equally well served by a respected rising star. In any bank, the key to a young loan officer's success is the ability to develop a high volume of low-risk loans. I've seen several bright young loan officers who work hard for their customers and are able to sell their proposals to the senior management or loan committee.
* Is your loan officer competent enough to explain your loan to others?
Your loan officer is your in-house advocate. Even if your loan is approved on the spot, it still will have to be reviewed by the credit department and, if it's a large loan, by the loan committee. Their ratios and formulas may seem like another language compared with your loan proposal, and it's up to your loan officer to serve as an interpreter, providing what they need to analyze your request.
Loan officers need to be able to explain who you are, how you are organized corporately, how you fit into your market, what you are using the money for, why the terms and conditions are a good deal for the bank, how you are going to pay the loan back, what your financial condition is, and when they can expect to receive progress reports on your operations.
I've seen presentations that left senior management with the impression that the loan was a low risk and a highly profitable bank asset. I've also seen loan officers appear before the loan committee like a hog on ice: they didn't know much about the borrower's financial condition; they described the purpose of the loan as working capital, which means absolutely nothing; and they weren't sure how the loan would be repaid. Needless to say, such a presentation leaves senior management cold.
* Is your loan officer willing to be creative and take a reasonable risk?
By that, I don't mean does the banker make unsecured, five-year loans to pay this year's taxes. That's not creative, that's stupid. But loan officers are under a lot of pressure to make a high volume of loans with a low level of risk. Individual loan officers react to these pressures in one of four ways. Some will make a high volume of high-risk loans. You don't want one of them as your banker, because he won't be around long, and when he's fired, your loan will look bad by association. Some will make a low volume of low-risk loans. You don't want that kind of loan officer either, because he will probably be promoted off the loan floor and into the credit department. Some will make no loans at all. If you run across someone like that, he or she is an FDIC employee and your bank has failed. Finally, some may succeed at making a high volume of low-risk loans. You want one of them. That officer will get your loan approved with creative structuring and will make sure the bank feels well secured.
Once you've settled on a good banker to work with, you then have to manage the relationship. The best way to do that is to follow four simple rules of banking etiquette. The idea is to build a solid partnership when times are good, so that you can work together should hard times fall on your company.
The first rule is that when it comes to sharing financial information, treat your banker as a full partner, not as a difficult minority shareholder. The thing a banker fears most is a bad loan. If your loan officer thinks you are not telling the truth, or if you are telling only partial truths, or if you are not talking at all, that will bring out the worst side of his personality -- fear of an impending loss takes over. And there goes your advocate.
The second rule is to invite your banker to your place of business. Let him meet your key employees and see how the business works. Show him your accounts receivable billing-and-collections process and your inventory ordering and control. The when he goes to the loan committee with your current or future proposal, he can enthusiastically explain why your company is successful: "I've been there and I've seen it myself." There is nothing as persuasive to a loan committee as that sort of personal endorsement.
The third rule is never become overdrawn; never become past due on a payment; and never fail to deliver your regularly scheduled financial statement. Repeat these words again and again until they become a mantra. Your loan officer has been taught from his first day as a trainee that the first signs of a bad credit risk are overdrafts, past dues, and late financial statements. For you to violate any one of these rules is like pouring gasoline onto a stack of wood. At the first sign of trouble, your banker will have visions of your loan going up in a blaze, exactly what he fears most.
The fourth rule of banking etiquette is to answer your banker's questions openly and honestly. If he makes recommendations, give them serious consideration. Accept his advice as well-intentioned observations that are meant to help you do better. The good banker views part of his role in life as helping businesspeople succeed. As one of my bank's customers put it, "Having to report to the bank and answer questions took a lot of time and cost a lot of money, but it helped me keep focused on how the business was doing financially. It helped us to become very successful."
Businesses tend to fail for one of two reasons: poor management or inadequate financing. It's up to you to provide the good management. To provide the adequate financing, you need to find a good banker. Selecting a banker, and then learning how to work with him, is the same as developing any kind of good partnership. Both partners have to be sensitive to the other's needs.