Tag: loan interview

Why Character is King when it comes to Getting a Business Loan

Why Character is King when it comes to Getting a Business Loan

Lenders talk about the 5 C’s regarding business borrowers:Cash Flow, Collateral, Capacity, Conditions, and Character.

Cash Flow has to do with the amount of cash the business generates.  It looks at the business’ revenue and its expenses.  Cash flow analysis identifies the earnings a company produces; the lender knows those earnings will be used to pay down the loan interest payments and principal so it is look for sufficient earnings.  Collateral has to do with the business’ assets such as equipment and inventory.  If need be, the business can sell its collateral to make good on its commitment to pay down the loan.  Capacity has to do with personal assets the business owner has.  If cash flow and collateral is insufficient to pay back the loan, the owner can always rely on these personal assets.  That’s why if the owner has real estate or a large personal bank account, this will increase the likelihood a small business will be approved for a loan.

Conditions refer to the general economy; are we headed for a recession, or are we in the early stages of a growing bull market?  Lenders will lend more in the latter than the former.

But beyond these four elements is the fifth- Character.  Character can be defined 100 different ways by 100 different lenders.  But ultimately it has to do with the honesty and integrity of the borrower.  Character impacts all the other C’s because if a borrower is dishonest, the lender may not believe the provided documents to attest to Cash Flow and Collateral, for example.  A dishonest borrower may forge or manipulate these documents.  So how will a lender ascertain your character?

For some lenders, they keep it simple.  They evaluate your personal credit score as a proxy of character- the sum of your past willingness to keep your commitments to lenders.  Others will also order a background check of you and other owners to determine if there is any criminal history or indicators of lack of commitment, such as defaulting on student loans.

According to “Money, Money Everywhere”:

Character. It’s a crucial step in the loan application process. You must convince your banker you have what it takes to succeed…..For them, for bankers today, determining character is the most important task. If they purchase an item, or take one in on loan or pawn, and that item is stolen or fake, they lose their entire investment. This is no different than any other borrower from the bank. If the intention of the borrower is not to pay back the loan, in actuality there is little the bank can do about it…..

Your reputation was defined in the past by your associations in the neighborhood, but today that reputation is more defined by how you show up on Internet search engines.

Did you do your assigned homework and Google your name? Bankers now understand more than ever that Google helps define your character. When the banker types in your name and an unflattering article pops up, that will be extremely negative to your case…..Other character tests are old school. In the past, it was important what organizations you belonged to, what country club you belonged to, and the lineage of your mother and father. Google has replaced that caste system.

If you there are negative accounts written about you on Google, there are ways to address it.  You can contact the website and request a take-down of the offensive material.  Another option is to work with a company that specializes in improving online reputation such as Reputation Defender.  Companies like Reputation Defender create original content and use search engine optimization to rank positive articles about you while pushing down in the search engine negative accounts.  This means that when people search your name, they will see the good representations and may not see the negative accounts unless they click to later pages on Google.

Knowing that Character is central to loan approval means that you can take proactive steps in preparing yourself prior to the loan application to give yourself the best shot of approval.

Restaurant Small Business Loans – Being Prepared for the Loan Interview

Restaurant Small Business Loans – Being Prepared for the Loan Interview

The kinds of questions that a lender will ask depends heavily on the nature of the business of the borrower.  Restaurants, just like any other business, have their own peculiarities.  A lender’s job is to get paid back with the least hassles and when deciding whether a restaurant should get a loan, his task is no different.  What is different is what data he looks for when discussing the loan with the borrower.

An excerpt from the book “Money Money Everywhere” explains some of the questions a lender may ask:

For a restaurant, one matrix could be the average size of the check for the lunch crowd, and is it growing or shrinking? For dinner, is your customer’s alcohol consumption up, or down? How many special events do you have planned for next month? What percentage of your sales comes from catering? What are your gross margins on the new buffet you introduced?

As you can see, the questions are industry-specific.  Lenders are impressed when borrowers have these figures on the top of their head; they can recite them instantly.  They know the average bill of their customer; they know if it’s trending up or down.  And even better- they know why.  If you’re in the restaurant business, you know there are a multitude of factors why this might be – new competition, trends in terms of demographics in the neighborhood, menu changes, etc.

The book also points out the difference between perception and reality as far as restaurant loans:

One of the great disconnects in the small business lending industry is the fact that we all see the failure rates for restaurants are staggering yet restaurants continue to be the number one receiver of small business loans.

Lending still has an emotional and qualitative dimension.  Sure with online lenders, much of the restaurant loan application has become numerical or mathematical.  But even with such lenders, they will often follow-up an online application with a phone call to inquire further, often wanting to know information about the business specific to it and specific to the industry it operates in.  In this qualitative dimension, some lenders may operate on the bias or mistaken assumption that restaurants fail at a disproportionate rate so it’s important to be able to explain the financial strength of your business with real data.  Generally, citing data from a one-year old balance statement won’t cut it.  Most lenders want to see that the borrower is on top of their current financials.  When going through the loan application phase, it’s not a bad idea to keep a cheat sheet of your key financial indicators to refer to when talking with lenders.

To summarize from “Money, Money Everywhere”:

Bankers aren’t stupid and they know the risks that come with restaurants, but they still do it. If you want to be one of those restaurant small-business borrowers, you need to first convince yourself that the business is viable and then convince the Old Man sitting behind the desk.

Being prepared to discuss your restaurant’s financials will put you in the best position to be approved for the restaurant small business loan, whether you apply to an online lender or a traditional one.