Recently I came across articles in the LA Times and the Herald-Tribune (Sarasota, FL) that talked about the importance of preparation and presentation in applying for an SBA loan. What is coming out is that, of the traditional “Five Cs” that lenders look at, “Character” is becoming the most important ahead of “Collateral.” As business expert Bob Coleman points out in the LA Times article (“Do your homework before applying for SBA loans”), “Small-business lenders fell in love with collateral, and what we found out during the recession is collateral doesn't repay loans.”
“Small-business lenders fell in love with collateral, and what we found out during the recession is collateral doesn't repay loans.”
Bob Coleman
In her LA Times article, writer Cyndia Zwahlen points out that, while the Recession has been “officially” over for some time, small businesses are still having trouble getting loans. Loan approval rates were down 7% in the first half of 2011 (January 1 to June 30) compared to 2010, in large part because of the end of sweeteners put in place by Congress that ran out on December 31. She goes on to explain how some successful small businesses were able to satisfy their lenders by going into additional details in their applications. For example, Anaheim Brewery was able to get an SBA loan after going back and rewriting their application to flesh out information. The owners took advantage of professional advice in order to meet the new requirements, which is something I always stress to business owners.
In his article in the Herald-Tribune (“Is your ‘character’ good enough to lend to?”), Jerry Chautin goes into even more detail on the importance of this first “C” in lending. Chautin points out that, even though banks were requiring large amounts of collateral, this did not prevent businesses from defaulting on their loans when property values dropped through the floor. The businesses that made good in spite of the economy were those where the owner was committed to seeing it through. According to Bob Coleman, who was also interviewed for this article, “borrowers with strong character traits will do everything possible to avoid defaulting when conditions are stressful.”
Character is everything in business. Without the owner and their character - good , bad or indifferent - the business is just a box filled with “stuff.” See the failure and closing of Borders Bookstores and recognize that character lead to its demise.The character of the owners led to a complete commitment to brick and mortar retailing instead of adapting to changing economic conditions. That is why Borders stores will soon be empty boxes.
Business ownership is not for the faint of heart and it is most certainly not going to work for someone who's character is suspect
Understand that business ownership is not for the faint of heart and it is most certainly not going to work for someone who's character is suspect. An entrepreneur can have a boatload of money, a Harvard MBA business plan, tons of collateral and great credit, but if that person lacks in character then the business is just a train wreck looking for a place to happen. From my experience, the two areas in which character will be best revealed are the military service and business ownership. Both are hard anvils on which a person's character is tested and forged. Both arenas are combat oriented and those without character will most certain fail. People who have served in the military are often favored in the business world due to their character.
So just how does one go about proving good Character to a loan officer? It comes down to a combination of preparation, presentation, and preservation. You need to be well prepared before you go in to speak to the loan officer. As Chautin explains, you need to know what is in your loan application packet and not just plop some professionally created document on the desk. “The loan officer will ask you pointed questions and expect you to know the answers without fumbling through pages of financial statements.” Chautin also suggests you get to know your loan officer before you submit the business plan. Prove that you know your “stuff” first.
Also important, in this age of digital diarrhea, is preserving your character. Chautin suggests doing a Google search of your name to make sure there is nothing on the Internet that could tarnish your character. This also includes being aware of people with the same or similar names who may have character challenges. If you don’t think loan officers will do the same search to see if you are credit-worthy, you probably shouldn’t be in business to begin with. Go through your Facebook account and make sure those questionable party pictures have been removed from your page. If your friends have tagged you in pictures that would reflect poorly on your character, ask them to remove them or at least remove the tag to make it more difficult for a loan officer to find them. Do your due diligence to make sure the face you present is the best possible. Character can and will get a loan even if the other qualities of lending are not in perfect balance. It can take some real diligence to find the lender willing to loan based on this vital "C" of credit, but perseverance is one of the hallmarks of a person with good Character.
These are trying times for businesses of all sizes, but particularly for small businesses. Wall Street got its bailout, but Main Street continues to struggle for capital. If you are a small business owner and are considering an SBA or other loan, be sure to get good advice from someone with knowledge and experience in the field. With over thirty years in lending and finance, I have the background and contacts to help you through the difficulties of applying for a loan. Feel free to contact me at the links below. If you own or are thinking of opening a restaurant, watch the special video on this page.
Pretty insightful post. Never thought that it was this simple after all. Payday loans are small cash loans were to last only until the next payday. The amount is usually based off of your income, and although some lenders allow a certain flexibility in repayment plans are in their pay period. These loans carry high fees and interest rates, leading many to consider solutions from bad to financial difficulties.
Posted by: Settlement Loans | 11/15/2011 at 12:03 AM