Why is getting a business loan is so difficult?
Why is getting a business loan is so difficult?
I recently found the answer to this question. On May 23 I was part of the audience for a presentation organized by the Sacramento Valley Chapter of the Risk Management Association. The topic of the forum was called “Bank CEO Forum…Sailing Uncharted Waters.” The main event at the presentation was a discussion with three members of a panel who were all CEO’s of their respective banks; Ray Davis from Umpqua Holdings Corporation, Bob Flautt from Folsom Lake Bank and Scott Kisting from America West Bank.
The presentation went for about 90 minutes and covered a cross section of issues around the economy and specifically the current business lending environment. Two things in particular stood out.
The first was that the banks are wrestling with the huge amount of legislating that is coming out of Congress. It was the opinion of all 3 CEO’s that the volume and complexity of the legislation was requiring all the banks to carefully review and decide each loan. All three CEO’s were in agreement; they simply had no interest in approving any loan and then have the different government regulation agencies be called in to see an underperforming or failed loan then look at the underwriting process to see if any short cuts or mistakes had been made. The implications were clear. If one loan had failed or was underperforming the regulators would look at all loans which was a huge time consuming and distracting process. All loans are approved at a point in time. Once a loan is approved then things change. Trying to avoid a mistake that had great clarity after the event was unreasonable but was part of the process.
For the bank CEO’s to manage this difficult and complex regulatory environment, their approach was very simple and predictable. Instruct the Business Development and Loan officers who received requests for loans to be careful with the loans they would submit for further review.
One of the interesting discussions was how a bank would decide if a loan was worth considering or not. There are financial or technical lending requirements to approve any loan. If a loan application did well with most of these requirements, in previous times this would probably be enough to have the loan approved. However, the banks now want to know the applicant and if they feel the borrower has a good chance to repay the loan. That is, the financial and technical loan requirements are important but what’s more important is the character of the borrower. As one CEO put it, when we approve the loan we want to know the borrower will repay it.
If you are thinking of applying for a business loan, get to know your banker. Press the flesh, that is, go and meet and talk to them. Don’t have a conversation over the phone and explain why you need the loan, how you’ll pay it back and why you are a good credit risk. Go and talk to them so they can get a feel for who you are and why.
This one statistic from one of the CEO’s caught my attention. He said that for every 200 loans the bank approves, they have to be sure 199 will be repaid. That’s the margin of error the banks are currently working in.
At the beginning of this year I was able to close a business transaction with an SBA loan for over $1 million. In my opinion, the reason the loan was approved was because the borrower and I made a visit to the SBA lender and spent 2 hours explaining in detail the history of the business and the direction the borrower planned to go. It was the personal meeting that made all the difference.
The SBA loan process is very extensive. One of the requirements is for the borrower to complete a Personal History statement or form 912. This form outlines the personal history of the borrower and if they’ve had any criminal convictions. If this is the case, a lender will be reluctant to get into the loan application process as it simply takes too much time. Whether we like it or not, the SBA requires the banks to make sure they are lending to people of high personal character. If there is a problem, the bank has to complete the entire underwriting process and then submit it to an SBA office in Washington DC for review and approval. It is simply not in the lenders interest to spend so much time and energy trying to get a loan approved. They are better to spend their time and resources looking for other lending opportunities.
Each quarter I get a report from the SBA regional office in Citrus Heights showing which banks are lending. It’s public information. Often I post this report on my website. If you are interested in seeing the most recent report, simply click this link – SBA Loan Approvals. As you will see, the banks are lending. The application and review process is very thorough and therefore slowing down those loans that are being approved. If you have an interest to get a loan, start talking to a lender and make sure you present yourself well enough and can assure the bank that at the end of the day, you are going to repay your loan.
If you are interested in getting an SBA loan, give me a call on 916 570-2674 and let me help connect you with a lender that can help.