How to Woo Your Banker

By Bernard H. Tenenbaum, Jay W. Trien

To secure a loan in these troubled times, you need to understand how banks process loan applications, how they assess risks, how they view customers — how they view you.

The scene is familiar to many bankers. The owner of a family business walks into the bank one morning and announces, "My daughter and I just decided we want to open a new store."

This owner is looking for a loan. He and his daughter have been thinking that in the current economic climate they can build cheaply or get favorable terms on a long-term lease. The business owner has a rough idea in his head of how much inventory his new store will need, how many sales people he will have to hire, what the probable cost of construction or rent will be. He even has a good idea of what the store's first year sales are likely to be.

But he hasn't brought along anything on paper to document his assumptions and numbers; he doesn't have a business plan to show. The banker smiles and says, "Let's talk about it." But what he has heard the customer saying is "Ready! Fire! Aim!"

This is culture clash, and in tough economic times the banker is going to suggest that, rather than opening up another store, the owner analyze excess inventory in the stores he already has and consider cutting back on his payroll.

The past few years have been among the most difficult in memory for business owners who want to borrow from banks. Long-established relationships between family businesses and their banks are under stress. Bank customs and practices on loaning money vary. Some terms at certain banks are negotiable and others are not. To successfully woo bankers, you have to understand how they process loan applications, how they assess risks, how they view customers, and especially, how they view you.

In the wake of the S&L crisis, banks face increased regulatory pressure to prune marginal loans from their portfolios. At the same time, new reserve requirements are forcing banks to set aside a higher percentage of their asset base for bad loans-which makes them reluctant to add new loans.

Furthermore, the value of real estate, traditionally one of the chief sources of collateral for family businesses, has fallen substantially over the past few years. Banks have been burned by the declining real estate market and are now extremely cautious about securing loans with property.

Many family businesses have been hurt by the banks' changing priorities. During the previous decade, the lending climate shifted away from traditional middle-market companies to "glamour loans." There were high profits available in equity participation in real estate development and in highly-leveraged transactions with LBO artists or corporate raiders. International lending was much more exciting than dealing with middle market companies close to home.

Bankers were invited to conventions in exotic places where they were wined and dined by officials whose names would impress the folks back home.

In the nineties, banks have been watching their customers' sales decline after a decade of growth. Loan officers have grown accustomed to listening to business owners who want money to cover cash-flow shortages. As a result, many bankers expect their customers to retrench for survival. They want to see businesses cut staff and curtail borrowing for expansion.

When seeking bank financing, family businesses start with a few basic handicaps. Family businesses are generally run for the benefit of the family, not to produce attractive financial statements. In addition, lenders are always concerned about problems of ownership and management succession. When a company is approaching a leadership transition, when a strong founder or leader is about to retire, bank lenders want to know whether the successors are capable; they want to know whether there has been sound succession and estate planning, with buy-sell agreements, proper valuation formulas, and affordable buy-out programs. In short, the bank wants to minimize the risk of a business failure due to succession problems.

If the family can deal with succession issues, the rest of what the company has to do to borrow money is much easier. It starts with a business plan, which, when approaching a bank loan officer, serves as a piece of sales literature.

Surprisingly, many family companies-even those with revenues in the $5 million to $25 million range-don't have a plan. For these companies, planning means informal discussions with key advisors, family members, and friends. Some owners of big companies have never bad such a plan and have never even borrowed money. As one owner of a $20 million business said at a recent lunch: "My grandfather never borrowed money, my father never borrowed money, I never borrowed, and I don't want my son to borrow."

Banks do not feel comfortable with businesses that do not plan in the traditional manner. The world of the banker consists of voluminous files with carefully recorded analyses of lending opportunities and risks. Bankers want business customers to be equally precise in spelling out the company's goals and projections. Your business plan should describe the company, its history, and how you see its future. It should include the details of how you plan to finance your expansion plan, how much you will need from the bank, when you will need it and how long you will need it. It must also describe how you plan to generate the cash to repay the loan and what you will do if you do not get it.

The plan should be prepared in-house, with input from key managers in various areas of expertise. You can ask outside experts to review the document and test your assumptions. But the final draft should be written by you, the owner-manager, not by a lawyer or accountant. You must understand the assumptions behind the plan and where the numbers come from. Your banker will not be impressed if you are forced to reply to questions by saying, "My accountant understands that," or "Only my lawyer knows the answer." Such responses suggest that you are not in full control of your business.

After you have presented your plan and submitted a loan application, how will the bank decide whether or not to approve it? The process varies, but usually a loan officer will be assigned to shepherd the application through the bureaucratic procedure. In most banks the loan officer must make a formal presentation before a loan committee. Before that takes place, two or three bank officers will usually have signed off on a loan.

Banks usually divide their customers into industry groups, or loan groups, according to sales volume, the size of the loan requested, or both. For example, a bank may consider applications from printing companies in two groups-those with $5 million or less in revenues and those with more. In looking at each application, the bank will compare a company's performance with the overall industry performance. It will also examine the quality of the collateral for the loan. 'Men it will assign a numerical score to the application, which represents the degree of risk involved in the loan.

Generally, loan officers prefer to handle larger loans, which, if they succeed in steering them through the approval process, can help them earn raises and promotions; if the size of your requested loan is at the low end, you can expect the process to take longer.

Likewise, if you are an important firm in your industry group-if the bank is making money on you-the approval process will move quickly. If you are not so important, you'll have to wait longer. To find out how important you are to the bank, ask what risk it has assigned to your account. When a bank doesn't regard you as important, it is only too happy to inform you about how much money it loses on your other business activities and accounts. The bank will resist revealing your profitability and risk score when you're a valued customer-but will when pressured.

Who you deal with also matters. The bank representative who makes the cold call at your office may be charming, but he doesn't have much clout in the loan process. Find out who your banker's boss is and what industries he or she likes or doesn't like; it will be helpful in making your pitch. Look into who sits on the loan committee; maybe you have worked with one of the members before and you can ask that person to vouch for your company's reputation.

The loan should not be negotiated by the company controller or an outside CPA. The owner who is borrowing the money should deal directly with the loan officer, using the assistance of the outside CPA. When banks lend, they want to assess the quality of the management as well as the character of the borrower. Employees or outside experts can handle the preparation of the loan application and other details, but relations with the bank must be managed by the family.

One of the touchiest questions is how to avoid giving personal guarantees. If you did not have to give personal guarantees for loans in the past, count yourself lucky and try to hold onto that position. What the bank asks of you can sometimes change, however, unless you have a fortress-like balance sheet.

Traditionally, business owners have put up real estate as collateral in an effort to avoid personal guarantees. Based on their own portfolio experiences, however, banks no longer have confidence that real estate will hold its value. In addition, a bank may ask for personal guarantees because it feels that is one way to ensure you will stay with the business no matter how tough it may get. The truth is that it is easier for a bank to sell off your personal stock portfolio or apply your savings account to the loan than it is to step in and run your business. The bank wants to be repaid, but is also interested in liquid collateral.

If you do have to guarantee the loan, make sure the agreement requires the bank to go after the business assets first. Also, you may be able to get away with partial guarantees-that is, the bank may agree to a ceiling on the amount of your personal assets that it can take.

A trap that many entrepreneurs fall into is the belief that "I can get it wholesale somewhere else." When you rent money from a bank, it is far more important that you get as much as you need, and get to keep it as long as you wish, than it is to get it at the cheapest rate. The rate is less important than the rental terms. For a long-term loan, the bank is taking a greater risk and therefore charges a higher rate. The bank may also require a covenant allowing it to call the loan when it "feels at risk." In effect, that means a longterm loan is really short-term. You may be willing to pay the high interest rate, but you should not have to accept such a covenant. By the same token, if the bank insists on such a provision, you should ask for a lower interest rate.

As banks have returned to the "basics" that they like to talk about, they have discovered that the middle market is still there. A recent study by the Caruth institute of Owner-Managed Business at Southern Methodist University in Dallas showed that middle-market customers provide higher yields, higher deposit-to-loan ratios, and far lower loan losses than all those big deals that the banks chased in the'80s.

But negotiating with a bank requires an understanding of the culture and procedures of the loan- granting institution. In the end, banks simply want to feel confident that your company has the ability to repay the loan and that an equity buffer (collateral) is in place in case the loan goes south. If you can present a good business plan and demonstrate clarity on management succession-and if you find the right loan officer-your bank may well say yes.

Bernard H. Tenenbaum is founding director of the George Rothman Institute of Entrepreneurial Studies at Fairleigh Dickinson University in Florham-Madison, New Jersey. This article grew out of a seminar at the Rothman Institute which identified strategies for obtaining financing in the current economic climate.

Jay W. Trien is senior partner in the accounting firm of Trien, Rosenberg, Felix, Rosenberg, Barr & Weinberg in Morristown, New Jersey. Trien is, frequently hired by banks to consult on troubled loans and is president of the Venture Association of New Jersey.

Rating Business Loan Risk: One Bank's GuidelinesThe table summarizes the general criteria used by one bank to rate the risk of business loans. The criteria conform with recommendations of the Office of the Controller of Currency.


Rating Overall Financial Condition Management Debt Coverage Leverage Earnings Trends Industry/
Borrowing Capacity
Highest Quality
Virtually risk free Great depth and expertise; strong financial management Very substantial margin Minimal; balance sheet ratios excellent Superior sales and earnings trends Well diversified;
expanding markets; leading competition
Substantial unused debt capacity. Ready access to bond markets
High Quality
Minimal risk Good depth and experience; competent financial management Substantial margin Minimal; balance sheet ratios quite strong Strong sales and earnings trends Diversified;
markets; strong competitor
Access to bond markets. Unused debt capacity
Good Quality
Reasonable risk Experienced; some
back-up; good financial controls
Margin of excess coverage present Prudent; balance sheet ratios strong Steady gains Involved in strong growing market(s); fully competitive Very appealing to commercial banks
Acceptable Quality
Acceptable risk Experienced; lacking depth; financial controls in place Adequate Average; balance sheet ratios adequate Positive sales and earnings trends Involved in strong market(s); competitive presence Appealing to commercial banks.
Marginally Acceptable Quality
Developing risk Fair; adequate financial controls and management Slim margins but still covering requirements Acceptable; balance sheet ratios may be somewhat strained Generally profitable year-to-year Stable markets and viable competitor; or promising markets & untested competitor Generally acceptable to commercial banks
Other Assets Especially Mentioned
N/A Possibly weak financial controls and management No room for debt expansion Fully leveraged Uncertain trends; may fluctuate Possible, deteriorating markets and/or
competitive position
Limited alternative sources of financing
Inadequately protected by the current sound worth and paying capacity of the obliger or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Standard Assets, does not have to exist in individual assets classified Substandard.
Has all the weaknesses inherent in one classified Substandard with added characteristics that the weaknesses make collection or liquidation in full on the basis of currently, existing facts, conditions, and values highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss, is deterred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens and additional collateral refinancing plans.
Considered uncollectible and of such little value that the continuance as bankable assets is not warranted. This classification does, not mean, that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to deter writing off this basically worthless asset even though partial recovery may be affected in the future. Banks should not be allowed, to attempt long-term recoveries while the asset remains. booked. Losses should taken in the period of which they surface as uncollectable.


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Summer 1992

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