Understanding the Business Lender

Small-business borrowers can frequently become frustrated with lenders who, at best, seem disinterested in considering a loan proposal or with the lengthy amount of time that it takes to navigate through the application process. Borrowers may also become annoyed at the conservative approach that lenders typically utilize to underwrite business loans. These situations are very common and they originate from a number of factors that the borrower would do well to realize.

Lenders are primarily averse to risk. Their job is to make loan investments in situations where risk is substantially minimized, if not totally eliminated. For the risks that lenders elect to accept, they protect themselves by having several options for liquidating their investment. When lenders seem too conservative, they are actually responding to conditions that influence or support their position.

First, the business owner must keep in mind that the lender is in business as well. The lender has a responsibility to provide a financial return for its shareholders by obtaining funds from depositors or investors and then prudently lending those funds to responsible borrowers. They must also contend with the continually changing cost of funds as well as with competition from other regulated and non-regulated financial institutions. In addition, bank lenders have the burden of federal and state regulators to manage and comply with.

Second, most loan officers spend their lending careers concentrating on underwriting thousands of various business entities. Although they may know a little about many things, they generally don't know very much about any one thing in particular. And because small business loan officers are usually not specialists, they will likely have only a limited perspective of the inner workings of the myriad number of small business industries. As such, they'll act single-mindedly to protect the interest of the institution that employs them.

Some lenders, particularly many large, regional-sized banks, simply don't accept the risks involved with commercial loans to small businesses. Their policy has evolved to the strategy of accommodating business opportunities in the market so long as their funds have absolutely no risk concerning repayment; which, for all intents and purposes, means not lending to small businesses at all. Small-business owners seeking loans should therefore confine their search primarily to smaller banks or non-bank lenders with a more cooperative attitude toward the small business market.

The focus of preparing a loan application should be to utilize information that's currently available to the borrower as a function of good management. For instance, is the business earning money? If so, how strong is the cash flow? What are the long-term trends of the business as well as the market that it competes in? The purpose of this information is to educate the lender on every aspect of the business. But it must also convince the lender that the borrower too understands the data and is capable of using the knowledge to guide the business to success.

The lender is in the business of renting capital. Loans are made only in situations where the likelihood of being repaid is very high. By not being an investor, the lender avoids the risks often taken by small businesses or venture capitalists. There's no getting around the fact that lenders will always require more than one exit strategy to get their loan proceeds out of a business, typically by using collateral and personal guarantees. However, the protection that a lender requires for a loan can provide a safeguard for the borrower as well, in the form of a second opinion about the business. While lenders are rarely experts in the borrower's industry, many will have extensive general business experience that may be helpful to the borrower's overall situation.

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