For small business owners, the safest way to build toward their goals is often one small piece at a time. Whether the need is equipment, staffing, infrastructure, inventory, website development or marketing materials, manageable investments can enable entrepreneurs to seize new opportunities as they avail themselves and grow over time to meet new challenges.
And when small business owners need access to credit, they often look to regional and local banks. According to the 2018 FDIC Business Lending Survey, almost 53 percent of small loans to businesses at the end of 2017 were held by the nation’s smaller banks, even though those institutions held only 17 percent of all banking assets.
Even as technology has streamlined many aspects of the lending process, lending decisions made at the local level can allow for more familiarity with the client and case-by-case context when loan officers are considering applications. Local and regional bankers can also offer more detailed feedback during the approval process and counsel applicants on what they can do to improve their prospects. Their familiarity with local market variables and the people behind the business deals can give them added insight into a small company’s potential. As a result, smaller banks and regional branches often have more latitude when making lending decisions, as compared to major national banks.
Who makes the decisions?
“Because we are a local decisionmaker, knowledgeable of the community in which we serve, we can provide the best advice and the ultimate decision for our clients,” said Steve Trager, chairman and CEO of Republic Bank and Trust Company. “Larger institutions have a ‘decision matrix’ that tells them how to approve or decline a loan, whereas Republic seeks to understand the customer first and be a part of the decision that is in their best interest. Because no two clients are alike, a decision on a loan must be custom to the client and their situation.”
Local decision making is also at the core of WesBanco’s commercial loan business," said Market President Jeff Koonce. “WesBanco’s approval structure allows for approximately 95
percent of the commercial loans we originate to be reviewed and approved at the local market level. This allows us to move quickly on the vast majority of the loans that we underwrite,” he said.
The ability of loan officers to approve deals at the local level enables them to better understand their customers and build closer relationships with them in the process, said Larry W. Jones, central region president of Community Trust Bank.
“Our lenders underwrite their own loans, working with appropriate lending approval levels,” Jones said. “Each loan officer has a loan approval level. Beyond that dollar amount, the approval goes to a local loan committee, and further to a larger loan committee. The loan officer shepherds his or her loan to each loan committee. If approved, the loan officer then oversees the loan to closure and manages the relationship after that. That customer is the loan officer’s customer.”
Advocating for your business
Local banks can counsel clients through the loan process, said representatives of Monticello Banking Company, including Senior Executive Officer Ryan Cooper, Regional Executive Officer Rodney Weaver and Steve Brinson, branch manager at Monticello Banking Company’s Lexington branch (and soon of its new Jessamine County branch). Familiarity also allows them to take a big-picture approach to each request and evaluate every loan based on a host of related factors, including financial character, cash flow, industry/market conditions, collateral, capital and compliance.
“We recognize that our borrowers are experts in their prospective fields but not necessarily in finance. We are here to lead them through the process and help them reach their goals,” they added.
But small business owners can help to expedite the process by coming prepared. Successful loan candidates are well-versed in industry and local market conditions and they are knowledgeable about common operational hurdles, sales and marketing initiatives, cash flow and staffing. They are also armed with useful documentation, such as tax returns, personal financial statements, operating agreements and budgets or cost plans.
“If the business is a startup, we prefer to work with the borrower to ensure these topics are discussed in depth,” the representatives from Monticello Banking Co. said. “Many risk factors for new business owners are not considered until a comprehensive plan has been considered.”
Consider the particulars
Like every business is its own entity, every loan request has unique circumstances and individual merits, said Lesley Fluke, market executive with German American Bank, which entered the Lexington market in late 2018 through the acquisition of First Security Bank. In all cases, however, making sure the business can carry on with the added debt is paramount.
“We want to make sure the customer can make the loan payments based upon their available monthly cash flow, have adequate liquidity to weather economic downturns, and have some form of acceptable collateral to secure the amount borrowed,” Fluke said. “A customer’s loan history, as well as past business experience, are also factors.”
It helps when clients come into the process with a solid understanding of what the debt will mean for their company’s cash flow, she said.
“Understanding the healthy balance of cash and debt to fund business growth, how it impacts the operational cash flow of their business, and the risks to both the customer and the bank can help business owners and their loan officer work to find the best solutions to the owner’s borrowing needs,” Fluke said. “Working in tandem with a good financial advisor—whether an in-house accountant or a third party—can also help a small business owner understand their financial situation and what opportunities may exist.”
Cash flow to debt service requirements is a key ratio, along with what City National Bank Market President William Craycraft and several other bankers referred to as the five “Cs” of credit: character (integrity & experience), capacity (cash flow & debt service), condition (market / industry outlook), capital (equity) and collateral (pledged assets).
“First and foremost, the company needs to have a track record of sufficient cash flow to service the proposed loan,” Craycraft said.
“Collateral and/or a strong sponsor [guarantor] play an important role for companies that don’t have an established financial history or have not built up their equity. All of the other items are considered in some way or another, but the loan request stops quickly if the business does not have sufficient cash flow to service the debt.”
A little self-reflection can also go a long way for business owners who are looking to improve their borrowing prospects, said WesBanco’s Koonce.
“First ask yourself, if I was the bank, would l lend my money to this business? Identify the risks, and then present ways to mitigate those risks.” — Jeff Koonce, WesBanco
“First ask yourself, if I was the bank, would l lend my money to this business?” Koonce said. “Identify the risks, and then present ways to mitigate those risks.”
It also helps to consider the transaction from the perspective of the bank, Koonce added. “Be honest, and not emotional. Banks are entrusted with our shareholders’ investment and therefore have a fiduciary responsibility to make safe credit decisions that won’t put them at an undue risk.”
Be clear and concise in the materials you present to help the lender understand your business, said Craycraft, of City National Bank. Such materials can include a brief history of your company, a bio that demonstrates expertise, personal and business tax returns with an interim financial statement, a risk management assessment and a well-articulated loan request. “You want to convince the lender you have a grasp of all aspects of the business,” Craycraft said.
Along with the tax returns, company income statements and balance sheets, Community Trust Bank’s Jones also wants loan applicants to share their well-thoughtout plans for their company’s success. Take a lesson from the entrepreneurial hot seat on shows like “Shark Tank,” he suggests, and be ready to answer the tough questions. “Generally, many small business owners have really good ideas, but maybe have not given enough thought to how to execute their ideas—how to be successful,” Jones said.
And when it comes to organizing and articulating all the essential information that will lead your company to success, nothing can surpass the essential guiding document for any small-business owner: a business plan.
“Well thought-out and researched business plans including detailed financial projections
But ultimately, a successful business loan will be about not only how good the business may look on paper but also the confidence and comfort level felt with the person on the other side of the desk.
“I would suggest a business owner start with building a relationship with a banker,” Trager said. “You want a person who will take the time to learn and understand your business and the people behind the business. … Get to know your lender and make sure they understand your goals. Matching the right product with the need is key to your future success.”