Q: I recently was refused a loan for my small business, even though I met almost all the bank’s criteria: I had a strong business plan, good credit history and so forth. Despite this, the banker I spoke with said his bank was concerned that I had not been in my industry (though my company is successful) for a long time. I was totally surprised and upset. What can I do now?
A: During these difficult times, lenders are looking harder at intangibles. At the end of the day, it is cash flow that will repay the loan. The collateral and personal guaranty are nice, but cash flow is king. And you as the primary decision maker will determine how that cash flow is allocated. It is your basic moral character that will determine if you spend this money as intended (for loan payments and other essential items).
You might ask: What are the intangibles that will overcome—from the lender’s point of view—a good business plan and credit history?
A senior lender has told me that a borrower’s character is the most important consideration. Your banker apparently determined that your job history was an important character trait that did not match the bank’s criteria.
Lenders actually run into this type of situation fairly often. Many people start small businesses after gaining experience in a different line of work or moving from another part of the country or even other countries. It’s harder for a local banker to get a good handle on a business owner with a spotty job history or few references, so they look intensely at what they can learn about a person’s character.
I’ve talked with bankers, many of whom are now retired, who recall bygone days in rural and small town banks. Bankers knew their customers, their families and reputations. It was easier to judge character because people interacted frequently in business and social or community settings.
Now, bankers tell me that they probably don’t know a potential borrower until they walk in and ask for a loan. In other words, a banker is asked to place a bet on the borrowers most likely to pay back a loan, and they may not have much information to work with.
When you ask for a loan, they may actually Google your name and explore Facebook for clues on how to judge your character. This seems over-the-top, but these social media are tools that did not exist a decade or so ago and some bankers use them to gather information, especially if other data is lacking. Is there a chance a careless photo or some past history make you seem untrustworthy to handle a bank’s money?
It all boils down to the essentials: You get one opportunity to make a good first impression. When you are ready to approach another banker, make an appointment, but don’t lay on the business plan and its fancy graphics first.
Before your appointment, write several talking points to take with you—and commit them to memory. Be sure to highlight some of your past success and try to make the link that this pattern of achievement will continue. Know the details of your business and be ready to answer the banker’s questions. Offer the business plan after you and the lender get to know each other and you’ve answered relevant questions. Then the lender will have a better idea of your character.
Times are difficult right now, and bankers simply believe that borrowers with strong character will do everything possible to avoid defaulting, even under stressful conditions.
Character has always counted. Our fragmented society places a premium on a reputation for good character while making it hard to establish one and difficult for lenders to discern where to place their money.
Wojtowicz is president of Cambridge Capital Management Corp.