Bankers’ logic may sometimes appear inconsistent and unfair but in reality it is based on rather basic concepts. These concepts are fortunately straightforward and understanding them can help you prepare for successfully working with a banker. Understanding these concepts can also help explain the difficulty some businesses encounter attempting to gain approval for bank financing.
We work with bankers every day and are fortunate to know many bankers who love their jobs and provide excellent service to their clients. Many of our banker friends lament at how many times a week they are forced to turn away businesses that they quickly say could have qualified with the underwriting guidelines they had just a few years ago.
Understanding banker’s logic breaks into 2 basic parts: the Federal Depositors Insurance Corporation (www.fdic.gov) and the “Five C’s”.
What is the FDIC? This corporation oversees our banks to make sure they are not doing anything foolish that could cause situations such as the bail out. The FDIC also creates the foundation for market and/or lending criteria that the banks adhere to. Bankers rarely stray beyond the FDIC guidelines because the alternative is more oversight and action on the banks which results in tighter lending criteria on us as borrowers.
And how does a banker implement tighter guidelines? To take a stab at this we must visit the familiar banker underwriting tenet referred to as the “Five C’s”. The “Five C’s” are Capacity, Capital, Collateral, Character, and Conditions. These five concepts are all major parts of any banker’s underwriting guidelines.
Capacity: How quickly your projected cash flow will be able to pay back the loan? Existing credit arrangements will reduce your ability to qualify here.
Capital: Can the owner show enough liquid equity to provide a buffer should projected cash flow fall short of reality?
Collateral: This is what the bank can liquidate if needed to ensure they are paid back.
Character: Credit, History, and Management (especially relevant experience in the market you serve)
Conditions: Will the money be used for working capital, additional equipment, inventory, or some other purpose? The banker will also consider basic conditions in your market or industry.
It is a rather low percentage of businesses that can fully qualify in all 5 areas at any point in time. Some may have weak collateral (retail shops and restaurants for example), weak capital (startup or waited too long to seek financing), low capacity (cash flow is too thin to pay back in a reasonable amount of time), weak character (business or personal credit issues or lack of management experience), or unfavorable conditions (your particular market or industry is in a slump). Please keep in mind that there are many other criteria banks use to qualify deals beyond the “Five C’s”.
When a business qualifies for bank financing it means that many people at the bank scrutinized the business and believe it to be a solid bet for a loan.
When a business is turned down for bank financing it means that their risk tolerance was too low for your particular situation. It is not a grade given for your business or for you as a businessperson.
We provide alternative finance and specialize in helping smaller businesses grow. If you need more financing than a bank can offer or were turned down by a bank we may be able to help you. We make quick decisions and there is no cost to you for our evaluation.
You may contact us at (800) 790-3419 and please visit us at Oxygen Funding.