A banker’s view of business borrowing
We really are trying to get to a ‘yes’
I am pretty sure there isn’t a banker alive who hasn’t been reminded of the line, “Financial institutions only want to lend you money when you don’t need it.” It’s a memorable sound bite, but it really is urban legend.
What pulls owners away from their businesses to come into a financial institution is a need. The fact is we’re not in the business of defaulting to a “no.” We really are trying to get to a “yes.”
The banking model is very simple and straightforward. We take deposits and pay, albeit very low right now, interest returns to the depositor, or member in our case. We then take the bulk of those funds and lend them in the community in which we operate. The spread between those two numbers is the net interest margin. That runs between 2.50 percent and mid-3.0 percent, generally, today.
Bankers like to think we take on an advisory role, play a little bit of a consultant, and while often directly lend, we also take a look at complementary programs that may participate with us along the way so that you can reach your objectives.
What else do we look at? The “5 Cs” have been around for years, and still are relevant today. They are capacity, capital, credit/character, conditions and collateral:
1. Capacity: We take a look at what your cash flow has been and what it is projected (pro-forma) to be. This is typically derived from accountant-prepared financial statements or tax returns. In the case of a startup, it is from well-researched projections, with assumptions being part of that. It’s important to provide how you arrived at your revenue, expense and projected profitability, etc. The assumptions lend credibility to your Pro-forma statement.
2. Capital: The primary question here is – what do you have at risk? The less you have at risk, the more the financial institution does, and the more nervous it may get. The loss risk is substantially lower as you increase your investment. Borrower investment wasn’t always a requirement, but almost across the board now there has to be some investment from you to get to the “promised land.” These typically are 20 percent for real estate and 20 percent to 25 percent for equipment.
3. Credit and character: This measure is taken (in part) by your credit score as a personal guarantor for your business, which is more often than not required. The lender’s assessment of you, as well as reference checks with past professionals you have dealt with are other factors.
4. Conditions: I’ll use the apartment rental/multifamily market for the moment. It’s probably the closest thing to “red hot” we have seen in this state, particularly Concord and south for some time. Demand ranges from entry-level inexpensive to higher-end luxury units that are clear alternatives to purchasing a home. So, at least for the time being, for many financial institutions there is a fair amount of comfort in this segment, and lending has been brisk, given the demand and per-unit price increases over the past few years.
5. Collateral: Interestingly enough, it is important for sure, but no lender wants to get to the point where collateral repays the loan. It is really the third line of repayment for us. Documented operating capacity is first, guarantor fallback/strength and other resources are second, and liquidating collateral is a distant third.
Other resources include the U.S. Small Business Administration’s 7A and 504 programs. The 7A Program guarantees 75 percent to 80 percent of the loan balance on your behalf. This is often the difference between being able to lend or not. The 504 Program can be used for both equipment and real estate. It involves a first mortgage of 50 percent, a second mortgage of 40 percent (directly through an approved development company of the SBA) and borrower cash equity of 10 percent. The main benefit here is a long-term fixed-rate loan for the second position, as well as the relaxed down payment requirement of 10 percent.
There are also revolving loan funds, or “revolvers,” which involve communities and qualified business development companies obtaining grants from the government and lending the money in the community. It is then returned to the lending entity and the process happens again.
The NH Community Loan Fund is a great resource and a very creative entity that works with financial institutions and makes direct loans as well. The NH Business Finance Authority plays a similar role, but is specifically designed to not overlap with the SBA’s programming.
Remember, while you may not be feeling it every time, our job is to try to help you get the loan you are after and get you back to work.
Don St. Germain, executive vice president and chief lending officer at St. Mary’s Bank in Manchester, can be reached at firstname.lastname@example.org.