In our last post, we discussed the “5 C’s of Credit” and how they were NOT used in the PPP program. To review that post, check it out here. We ended that discussion with the question….why do the 5 C’s matter to the borrower?
My short answer is this: The borrower who understands how the bank is going to evaluate their business has a better chance for a successful outcome.
As I have talked to many business borrowers and lenders throughout the PPP process, I realized there is a responsibility to educate our borrowers that PPP does not represent the reality of business lending. Many businesses have never applied for a loan prior to this experience. Unfortunately, this process of applying for the loan, supplying very little financial documentation, and then being funded only a matter of days later is certainly not the norm.
As it stands right now, the program has successfully distributed over $500 Billion to the country’s small businesses to help them bridge this gap of uncertainty. The vast majority of the dollars lent will be forgiven and many of these businesses will be able to retain their employees and adapt to the new normal. What lessons will we learn from this?
Business lending is a hard, tedious task. As previously stated, Lenders do not like uncertainty and the next several months could represent the most economic uncertainty of our lifetime. The due diligence performed to underwrite and approve a loan is done to take away as much uncertainty as humanly possible. In reality, businesses do fail, loans go bad, and banks lose money on those deals. However, given the razor-thin margins bank make on every loan, it is no wonder they are not interested in taking a lot of risk with those assets.
In February, Big Banks approved a record-high 28% of their small business loan applications, while in April it plummeted to 8.9% (not including PPP). So, if it is so difficult to get a business loan approved, what can the borrower do to put their best efforts into this endeavor?
Here’s some ideas to help make the process go smoother:
Be Prepared: To make a good first impression on your banker, make sure your loan package is well prepared. Your lender will have questions, be ready with solid, pertinent answers to help them get to an approved loan faster.
Work together: You are not adversaries in this endeavor. While it may feel at times that your business acumen is being questioned, you must work together with the banker if you are to have success closing this loan. A guarded approach to answering legitimate questions regarding your business will not help your case. Be open to questions!
Be responsive: Applying for a commercial loan requires a lot of information. It can at times feel like the bank is requesting the same information over and over. Responding to these requests as quickly as possible will save time and effort in the long-run. The banker does not want to drag out the process any longer than necessary.
If you as a commercial borrower truly follow these simple steps, you will find more success.
We will dig into these ideas and more ways to be successful in Part 3.