As a consumer, it’s easy to understand the importance of an excellent credit score should you wish to obtain a loan. As a business owner, however, navigating the world of credit and lending can be much more extensive. In business, especially in a privately-held or family-owned business where the owner or owners are filling many roles, a close, working relationship with a local bank can be essential to a business’ long-term success.
“Even if you don’t have a great borrowing need now, it’s still a good idea to establish a solid working relationship with a trusted bank,” explained Maria Hunter, First Bank’s Relationship Manager. “In doing so, you will have already established some good will with the bank, allowing the banker to gain general knowledge of your business. Plus, you’ll already have a proven track record with your bank before ever even applying for a loan.”
Applying for the Loan
The process of applying for a business loan starts before ever entering the bank. Bob Sullivan, First Bank’s tenured Senior Regional Credit Officer, commented that it’s essential to work with a reputable Certified Public Accountant (CPA) to help you prepare accurate, current financial information.
To help ensure a successful lending meeting, gather the following information to bring:
- Three Years CPA-Prepared Financial Statements.
- Interim Financial Statement (F/S) within 60 Days.
- A/R and A/P Agings to match interim F/S.
- Business Debt Schedule and Projections.
- Business History, Industry Background, and Management Resume(s).
- Personal Financial Statement for each owner with greater than 20% ownership.
- Personal Tax Returns for the last three years.
“Remember, the more accurate and complete information you bring to the lender,” Sullivan said, “the higher probability you and your business will be considered creditworthy and have access to the funds it needs.”
Five C’s of Credit
Many borrowers may not realize that most reputable lenders use standards in which to prudently evaluate potential borrowers. They’re considered the “Five C’s of Credit,” including Capacity, Collateral, Character, Capital, and Conditions.
Your capacity to re-pay the loan is an extremely important part of the five “C’s”. In fact, Sullivan said, “A company’s sustainable, identifiable cash-flow is the most important part of the five C’s in credit.” In an effort to manage their own business risks, a bank’s credit department will need to verify the creditworthiness of the business owner or owners. “As the saying goes,” said Hunter, “Cash flow is king. That same holds true for borrowing. The bank wants to know if the business has the proven ability to re-pay the terms of the loan with proper cash flow.”
Collateral is defined by Merriam-Webster as a property (such as securities) pledged by a borrower to protect the interests of the lender. Collateral is considered the secondary source of repayment on a loan. Meaning, this is how banks will get paid if the main source of repayment, or the capacity, becomes inadequate.
Character is one of the most important aspects of the five C’s of credit to family-owned and privately-held businesses. “Character is key for family-owned and privately-held businesses,” explained Hunter. “This is because of the multi-generational nature of family-owned businesses. They want to uphold the values that were passed down to them or that they’ll hand over to the next generation. The owners are essentially the people behind the business.”
Sullivan explained, “At First Bank, we’ll go the extra mile to ensure we understand the numbers and the character of the people behind the numbers. To further support family-owned and privately-held businesses, we approach our lending with a long-term relationship mindset and not just as a single transaction.” Hunter added, “Having a working relationship established with a commercial loan officer that has the experience within their organization to advocate for you can have a large impact.”
Capital, or one’s assets, is considered a representation of the credit worthiness of the borrower. Capital is a form of equity investment into the company. “Again, lenders want to know that the borrower has some “skin in the game” and is committed to the long-term success of the business,” said Hunter. “Banks are not angel investors in a business, but rather long-term partners.”
The conditions of the economy and competitive landscape are also part of the equation. Banks take into consideration any outside support as well as the volatility and profitability of the industry. “In the past, I’ve had prospective borrowers unable to continue their business due to the impact of federal regulations and labeling standards set forth to their specific industry at that time,” she said. “What’s going on within a prospective borrowers’ industry is also part of the consideration for lending.”
It’s important to stay in contact with your banker, keep him or her informed of any changes to your situation, and, of course, to remain honest and upfront. With First Bank’s flat structuring and localized decision-making, rest assured you’ll not only receive prompt service but also direct access to the ones making the decisions. As always, First Bank’s team of trusted advisors is available to help guide you through the lending process.
For more information on the Five C’s of Credit or the lending process, contact a First Bank Commercial Relationship Manager today.