What Do Bankers Want?

What bankers book for may not coincide with what you're prepared to show

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If you've ever been turned down for a loan, or suffered through endless meetings before your loan proposal was approved, your kindest thoughts were probably that the banker didn't like you, didn't trust you, had poor judgment, or was an extreme pessimist. It's possible that you were right. It's also possible that you and your banker weren't speaking the same language.

One of the adages I learned as a young banker was "You can loan a good man enough money to break him." If you keep in mind that all bankers have been taught some version of this principle -- keep a borrower's debt proportional to his ability to repay -- you will better understand our language and our questions. Responsible bankers don't see it in either your interest or the bank's to loan you money that they don't believe you can repay. But there are a number of steps you can take that will increase our confidence in your ability to do so.

Let me tell you how the loan process looks from our side of the desk. When you explain your business to a banker, think of describing a tree. Most people are apt to wax eloquent about the beautiful leaves, majestic branches, and solid trunk. But bankers are the kind of people who want to know about the root system that supports the tree. And they feel the same way about a business. They want to hear about stability, integrity, and a good reputation. Since they're primarily interested in how you're going to repay the loan, they want to know where the essential nutrient -- cash -- is going to come from, however successful your company may look on the surface.

The way we view your management is a good example. Let's say that you walk into my office and explain that since you are a great manager, your skills and enthusiasm will more than make up for any inadequacies in your company. For argument's sake, let's say that I agree that you are, in fact, a supermanager. But if you are the only good manager in your company, one of the questions on my mind is "What's going to happen to my loan if you should walk out of my bank and in front of a Mack truck?"

Or say that you are 67 years old and there is no one in line to take over when you retire. In that case I'll wonder whether I should make your company a loan that will take it 5 to 10 years to repay.

I'll be much more positive if I see several good managers with balanced talents, mixed ages, and a fairly clear management-succession plan. A second adage that I learned early was "Bankers lend money to people, not to corporate structures." This attitude could be a real advantage to you, because as I become acquainted with your talented managers, you'll have a good chance of convincing me that your team can in fact make up for any other weaknesses I may find.

After you've made your presentation, one of the first things I'll do is order a credit report on your company from Dun & Bradstreet Credit Services and/or other credit agencies. I'll also call the other bankers you have worked with and ask about the size and repayment program of your loans and how well you met your payments. I may call your major suppliers to find out how much credit is available to you, how much of it you have used, and how well you have performed on your credit line.

If I find that you've had some financial trouble in the past, it doesn't necessarily mean that I'll turn you down. I will, however, be curious about how you responded to the trouble. I have had crditors describe to me at length problems suffered by prospective borrowers. The company may have gone through a period of slow sales, for example, or have had difficulty collecting on a large contract. If creditors follow up by explaining that the chief executive officer lost no time in letting them know about the problems, and quickly arranged extended terms, I begin to see a person of integrity responding appropriately to trouble. If the creditors go on to rate the company's credit good or excellent under the altered terms, I consider that a real credit strength. What I'm interested in is solid character and appropriate credit management, in good times and bad. On the other hand, if I find a person who folded under pressure, I will probably turn down the proposal.

Once I'm satisfied that you are creditworthy, I'll evaluate your financial statement, and I'll take a particularly hard look at how closely the value you place on your assets reflects their true quality. Sometimes I find that the assets are actually worth more than a loan applicant claims. This has happened, for instance, in inflated real estate markets when a company has purchased a building years earlier and has depreciated its value on the balance sheet. I've also seen it happen when the borrower has depreciated equipment down to salvage value, but has maintained it in excellent marketable condition. This gives me a lot of confidence in the strength of the financial statement.

The more common discrepancies, however, turn up when people list assets that are about as realistic as claims of owning a flock of wild geese. For example, inventory may be carried at its original purchase price even though it hasn't sold in more than a year. I'm interested in financing inventory that moves quickly and turns into cash to repay my loan. I assign little value to antiques. I don't put much stock in accounts receivable listings over 90 days past due, either. I know that my loans over 90 days past due have questionable collectibility, and I would have to be convinced that you are a better lender than I am to believe that yours are much more sound. These sorts of findings can't help but raise questions in a banker's mind. When a borrower overstates his or her assets, I find it hard to believe any of the rest of the presentation.

Another point on the quality of assets: I'll pay close attention to how diverse your accounts receivable are. If 50% or more are due from one or two companies, I will be very concerned about their creditworthiness. I'll also have to wonder what would become of you -- and my loan payments -- if they shifted their business to somebody else. As a result, I will probably expect you to maintain more equity in the business than might otherwise be necessary.

In my experience, you and your banker are most likely to talk past each other in the area of profits and cash flow. Borrowers often think that all of their profits are available to repay debt. Unfortunately, that is seldom true.

A company's cash flow is its profits plus depreciation Minus increases in assets, and it's the subtraction of increases in assets that is usually forgotten. Say a company earns $100,000 and increases its assets by $75,000. That leaves only $25,000 available to repay debt. If this company has current debt-service requirements of $25,000 a year, it will have to manage growth in inventory and accounts receivable with care in order to have the cash to service its debt properly. If the CEO came to me wanting a loan that would require an additional $20,000 a year in payments, I would be very worried about the company's ability to pay. The fact is, I don't want you to repay my loan by giving me $20,000 worth of inventory or accounts receivable. Like most bankers, I want cold, hard cash.

When you go to your banker well armed with your financials, satisfied with your creditworthiness, and proud of your management team and succession plan, you're still not home free. That's because we won't look at your company in isolation. To some extent, at least, how we judge your riskiness will be influenced by the performance of your peers. We subscribe to several services that evaluate the riskiness of various industries, and we also have firsthand experience in our own marketplace. If you are one of 10 area firms in a given line of business, and 3 others have recently failed, I'll look at your application with a jaundiced eye. If you are part of an industry from which bankers across the country have been reporting substantial losses, I'll have to question whether or not your company will fall prey to the same problems. Of course, the opposite is also true. If you had been in the oil business in the late 1970s, you would have found bankers tripping over each other to loan you money.

In any case, I'll expect you to know the trends -- both problems and opportunities -- in your industry. You may even have to educate me about the nature of industrywide problems and how they affect your business. One bit of advice, though. It doesn't help to tell me how terribly your competition is doing in an effort to make yourself look good. The truth is, as I said earlier, bankers are preoccupied with risk. If your competition is doing well and you stumble, at least you could sell off your assets to them. If they're doing poorly and you stumble, there aren't many options but to shut down your business.

Your position within your industry will also interest me. I'll want to know whether you are a leader, or 99th out of 100. I'll compare your operating results or balance-sheet position to your peers'. If your industry has an average inventory turn of four times a year and you have only two, you look bad. If your industry is earning an average 44% gross profit on sales any you have a 57% gross profit, you look good.

Another measure of your industry standing is how up-to-date you are. One of the realities of business -- every business -- is change, and I'll want to be sure that you are keeping up with your competition. I'll look to see if you are an innovator with the latest equipment, or a follower with equipment that will soon have to be replaced. I'll also want to know how strong the market is, and will be, for your product or service. If your prospects are good, that'll certainly raise my spirits.

As your banker, I would be very impressed by a business that has a virbrant and diverse root system. This would mean to me that you are the kind of customer whose growth I can finance today, and that we can grow old together with you as the lender, via deposits, and our bank the borrower. If, on the other hand, you have a fancy presentation about your trunk, branch, and leaves, but a weak root system, I'd be afraid that my money would dry up with your money, and that we'd both topple.