Commercial Lending: The X Factor
Commercial lending isn't all dollars and cents. In fact, you may be surprised to learn exactly what your commercial loan officer is looking for.

"You can loan a good man enough money to break him"
  --Banker's Adage

You feel you're ready. The idea is there, bursting at the seams for start-up financing. The company is growing and needs a boost to the next level. So you begin the stressful process of searching out capital. Sure there are angels, friends, and relatives to talk to first, but eventually you're going to visit the bank. Just what is that commercial loan officer looking for? Is your venture as rock-solid as you think it is?

Tim Edwards is a commercial lending officer at Vine Street Trust. He has worked there for two-and-a-half years, having come over after five years at Liberty National Bank.

"When my father was in banking, the banker was behind the desk," Edwards recalls, "and the customer came to the president or key officers like 'here's the poor people coming to the people who control all the money.' Now we're getting out from behind the desk, and promoting ourselves with service. All the money is green, the interest rates differ within a fairly narrow range, so the service is what differentiates us."

A lending officer's portfolio might have 30 customers with $5 million loans or 400 customers with an average loan amount of $50,000. Edwards has a commercial portfolio of more than 100 relationships, with most of the loans being short-term or lines of credit.

"Probably the most exotic we get is thoroughbred lending. We do real estate and equipment financing, home construction, accounts receivable and inventory for businesses – things that we understand, with clients we know. If we have a potential loan that falls "outside the box," we can often bend because we're comfortable with who they are. That's where we're the most aggressive, in getting to know people."

Of course, financing options are as diverse as ever, with the growth of microlending and the availability of arrangements directly with creditors. But the bank is still the centralized place to go, the intermediary between savers and borrowers that controls the flow of credit. But how can they possibly know enough about the growing spectrum of business today?

"You can get that false sense of security as a banker, thinking you know all about an industry," says Edwards. "We understand cash management, and the key components of a lot of businesses. I deal with manufacturers, wholesalers, restaurants, horse farms. I can get a broad understanding of the industry, but the main thing is getting to know that individual, how knowledgeable they are. and developing trust.

"If there's trust, then they're not afraid to talk to you about the good and the bad, and they know they're not going to be left to go under."

Pay Attention to the Details

True, nobody knows your business better than you, but while you're out procuring more work and shoring up efficiencies, are you devoting the same attention to the infrastructure of your company? Edwards finds that across the board, business people and would-be borrowers need to pay more heed to the crucial internal structure of their enterprises.

"The biggest shortcoming of the would-be borrower is knowing the work but not knowing the infrastructure: cash flow, payroll, etc.," declares Edwards. "I'll argue that it's just as important as doing the work. You have a guy out there working hard, making the money, but structurally he's not managing it well, there's no cash in the bank.

"Recently, I had a client like this who brought in a friend who had been in business before and knew accounting, somebody who knew what needed to be happening with the accountant, with the attorney, what kind of corporate entity to put it in and why. So it's a real nice partnership. The first guy doesn't have to worry about it in the detail that he did before, and I can talk with the partner and get quick answers in these financial areas."

At the same time, you have to be prepared to bank some of the risk yourself. In keeping with responses of bankers nationwide surveyed on this very topic, Edwards points to undercapitalization as another sticking point.

"Some people come in here wanting to borrow it all. It's hard to lend somebody that much – basically you're taking all the risk as a bank. I want something from that person out there every day at risk. You have to have help to grow. You can't keep coming back to the bank wanting to leverage over and over – there's a limit there."

In many cases, those limits can be circumvented through other means.

"If I have to turn down somebody, I'll often recommend they talk to friends, their accountant, or to people I may know that may be able to help them," Edwards says. "You can go down the road of guarantors. That's a touchy subject, but we need somebody to hedge that risk. But we're still not going to take a marginal business idea and put a guarantor with it.

"A lot of people don't understand the difference between venture capital and banking – many of these start-ups are venture capital concepts, but they're not big enough. They need $100,000-200,000, so they come to the bank. There are other alternatives, entities between banking and venture capital: SBA (Small Business Administration); a company we work closely with here in town called Community Ventures Corporation, where individuals can get education and training and apply for loans backed by grants from businesses. We continue to be impressed by their organization."

Judging the Risk

At the heart of the matter of commercial lending lies the fundamental instinct of the lender regarding the riskiness of the proposition. Some banks have gone as far as developing software to categorize potential borrowers within a spectrum of risk-grading in order to make loans less vulnerable to a chain of human attitudes. But Edwards knows there's only so much you can assess objectively.

"My expectations are about the same no matter what amount they're looking for," says Edwards. "I want to see somebody that's knowledgeable, that understand s their industry: what are they doing, where are they going, and why are they doing it? If it's in a specialty area, I'll call up somebody in that field to validate what they've said, see if it's viable.

"Just because somebody's been in business 10 years and is making a lot of money doesn't mean that going forward with growth is the right thing to do. We don't take that for granted," he says.

"Different factors control growth, and my job is to figure what they are. What's risk to the businessman may be different from what's risk to us. They're looking day-to-day, and I'm looking long-term. For instance, getting 70 percent of your revenue from one client is a big negative from a banking standpoint – you want that diversity – but I'll have people that can't see that risk."

"Part of banking is drawing some lines. If I'm right only 98 percent of the time, my bank will re-evaluate my ability as a lender. We have to balance that with being aggressive in making loans. Business people don't always understand that."

How do you quantify that desire to run your own business and make it succeed? You can tell by the way people present themselves, how well they've thought through it.

"There's a scoring mechanism for evaluating loan risks, but I would say 25-33 percent of it is intuition," Edwards concludes, "I have seen applications put together, where the numbers work and everything looks good, and they skip their first payment. On the other hand, I'll see people who may not have all the components neatly together, but there's a character there. They will see it through and stick with it. When it gets tough, some people will bail, and it surprises you sometimes, who bails and who sticks."

Adam Bruns is a staff writer for The Lane Report

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