‘Show me the money’

BUSINESS OWNERS who say they’re feeling more scrutiny from their bankers aren’t necessarily being paranoid: many bankers really are requiring more detailed information than in the years of easy credit before late 2008’s financial meltdown.

“The new reality in banking is that all businesses across the board are required to submit a lot more data than before,” says John Kimball, senior vice president at Park Midway Bank in St. Paul.

More likely those bankers are simply returning to traditional underwriting standards of more sober times, before start-up entrepreneurs could slap three mortgages on their homes to get funds or veteran owners could use a sky-high appraisal on a building as collateral.

“It kind of depends on your frame of reference,” says Rick Wall, CEO of Highland Bank in Minnetonka. “If your frame of reference is 05, 06, 07-credit standards are higher, clearly. Just try to get the same home mortgage you got then. It’s not there.”

But look further back, he says, and see a return to standards, not the dawn of new. “Lending guidelines that had been in place back in the 90s and early 2000s are probably still in place. Advance rates are very consistent with back then. A lot of the crazy stuff has gone away, in my mind,” Wall says.

Business owners would do well to adapt to this new reality, and find a banking relationship that works for their company today. They should be able to find plenty: all bankers interviewed for this article insist that their banks have lots of money to lend, that they are actively seeking new customers or expansion of existing customers’ business, and that they are competing hard for market share.

So how to get yours? From six local bankers, excerpted and edited from interviews conducted in January, here are top tips, straight talk and even some tough love so owners can gain the credit their businesses need.

Michael Zenk Venture Bank:

ABOUT RISK
“I’m a criminal justice and psychology major, and the only talent that I have is the analysis: Can this entrepreneur make their projects succeed? You’ve got to look backwards, how they’ve gotten here so far, how’s their personal credit, does this industry make sense?

They need to take the risk. The bank can’t take all the risk. And I’ve had that conversation thousands of times, where it gets down to it, and I say, Wow, this looks fabulous, you’ve got a heck of a plan here. And then I ask them, What do you think the risk is for the bank if we lend the money? It’s interesting, because 100 percent of owners say, You’ve got no risk. So I say, since we don’t have any risk, and there isn’t risk in your business, what I’d like is a $150,000 second loan on your home to secure this. And they say, Wait a minute!”

SKIN IN THE GAME:
“So they have to have equity, they have to have skin in the game. They have to be willing to pledge personal assets. I like the fact that when we started Venture Bank, 10 years ago, I took all my liquid assets and put them into the bank; I took a third mortgage on my house; I signed a personal guarantee for $700,000 to get our lease. So when entrepreneurs say, You’d never do that, I say, Yes I have. I’m an entrepreneur, too.”

IS CREDIT TIGHTER NOW?
“Absolutely, it’s harder for business owners to get loans now because the way they’ve operated in the past, the businesses-and there’s exceptions-they’ve operated based on, I’ll send my financials in once a year and my line of credit will be renewed no problem. But it’s different now.

The financial institutions have had to step up the requirements. We want to lend you money. Every single bank out there wants to lend you money. But hey, instead of this internally prepared financial statement, we need an accountant-prepared review on an annual basis. The world has changed. The landscape has changed, and the requirements are: we can’t in banking assume that things are going OK. We almost have to assume the opposite.”

WHAT’S A PROBLEM:
“We say, we want this golden goose to continue. And that’s something that three years ago, shoot, the lenders weren’t out here doing that. Regulators were assuming their other assets were doing poorly, but bankers weren’t. You have to understand everything about that customer. We run into it every day, where owners are frustrated. They ask, Why do you need that? We have to understand the whole situation. If there’s other debt out there, and if it’s not cash flowing, it’s a problem.

John Kimball, Park Midway Bank:

HOW TO GET CREDIT:
“The two biggest obstacles between a good business and a credit approval are one, finding the right bank, and two, communicating with that bank. We have seen a number of small banks, and mid-sized and large, experiencing their own difficulties. So while in general banks right now are very liquid, there are a fairly large number of banks that are under some sort of regulatory order. So one of the first steps a borrower needs to do is go onto fdic.gov or do a Google search for the troubled banks list.”

TALKING TO BANKERS:
“Everyone’s story has become a little more complicated with bad economic conditions. Sales across the board have gone down. That’s just a reality. One of the biggest things that small businesses are telling us is their primary problem is generating sales. But one of the things we concentrate on is trends. A good business can absorb a loss of sales, but if they’re extremely well managed and they are concentrating on margins, even if sales are dropping, the bank can say this is a good loan. But only if the banker really understands what’s going on, and that banker is able to relay that analysis to the decision-makers at the bank.”

NEW PRODUCTS:
“Consider alternative sources in addition to conventional bank products. In my case, I work a lot with SBA products, and right now SBA is probably the primary source of credit for these businesses in this environment. The Small Business Administration has come out with some new products. For example, the Caplines program is brand new, which will provide working capital to businesses that otherwise would need to factor. It’s working capital lines for businesses that sell and hold accounts receivable. The old programs were limited to $350,000 and this one goes up to $6 million.”

Rick Wall, Highland Bank:

HEALTH OF CUSTOMERS:
“When the markets really declined and business slowed across the whole economy in the 08/09 time frame, there were businesses that were proactive and made changes. And those that made decisions quickly are doing better than those who were slower. Those businesses figured out how to live at a lower cost level, and they’re healthy. The ones that lagged are not as far through the problems.”

WHAT’S DIFFERENT:
“Clearly bankers are making certain that they’re covered in terms of their documentation, and they’re monitoring their credits, because A, it’s good business, and B, no bank can afford any additional regulatory problems. The regulators are not the reason; they are just the additional reason. The real reason is because you want to make sound decisions for your bank.”

WHAT BANKERS LOOK FOR:
“The main things are the previous years’ financial earnings, the understanding of what you want the money for and how you’re going to repay it. And then it’s up to us to find a way to make it work for the customer and us. The government programs have improved, so we can extend credit in ways we maybe didn’t before. The 504 loan program, for example, has expanded the eligible borrower criteria, and they’ve raised the limit.”

Bridget Manahan, Western Bank:

ACTIVITY IN 2012:
“We are very actively seeking opportunities to make commercial loans. We are actively looking at our current customer base, and we’re actively seeking new prospects as well.

The businesses we are speaking with, if they have experienced a downturn related to the economy, they seem to have stabilized, and so often they are looking at expanding their businesses in some way, and this is an opportunity to re-examine their banking relationship.”

ADVICE FOR OWNERS:
“This is a relationship business, and so the more that a business owner can share about the business, and the more we can share with the business owner about mutual expectations and how we process decisions, I think the better the relationship.

We like to look at a business from all perspectives. We hope that business owners are willing to educate us about all aspects: products and services, management teams, position in the industry, what-if scenarios, in addition to the financial picture, such as cash flow forecasts and underlying assumptions. The more that we can understand our borrowers’ business, the more effective the relationship is, and the better position we are to put together a package of financial services that meets their needs.

EVALUATING EXPANSION PLANS:
“Whatever that acquisition or expansion is, first of all we ask, does it make sense in the context of their overall business model? For example, is it a fit with their current business; size-wise is it something that is manageable? A critical piece certainly is the projected financial impact on their business, and the projected cash flow associated with this, and taking that projected cash flow and really carefully analyzing the assumptions underlying it, and taking it back a step and saying, if, as projected, it doesn’t work exactly as we’d hope, is there still some wiggle room here?”

Mark Ethen, Northeast Bank:

ACTIVITY IN 2012:
“Everything is relative. Going back a couple of years, when there was really nothing going on-the volume and activities are up from then, from 09 and 10, and up from 11 as well. It seems like some things are happening. So there are positive trends, but not really that close to what it was years ago.”

WORKING CAPITAL REQUESTS:
“On the working capital end of things, it’s a litte more stable, like if you have a million dollar line right now we’re not seeing a lot of requests to a million and a half. Owners are pretty modest on those requests, and I think there are less troubled companies. Things went through a phase where borrowers would ask for more, just in case they needed it. That was kind of the model maybe a year and a half or so ago. It’s filtered down to everybody, that things are very stable now.

On the loan side, we’ve seen some new requests on the commercial real estate end of things. Buyers are out there, and they’re getting some good deals on properties, and there are folks willing to do a deal.”

BORROWERS VS. BANKERS:
“There are some lingering things that are out there that are putting challenges on things. If you’ve got a borrower that has a piece of commercial real estate and it was worth $2 million, and that appraisal has slid to $1.6 million, what the owner has perceived as equity in the deal, we get an appraisal and it’s not equity. That’s where the disconnect comes into play. Maybe the standards were always there, but this macro issue on real estate suppression is there.

So many of the business customers that we’ve worked with have had dips in their business cycles, between 08, 09, 10 and 11. Somewhere in that four-year span they’ve probably had a sales dip or profitability dip, so they might be on the uptick of that, but part of what we’re looking at is historical trends. And some of those things just take a little time to heal, from an underwriter perspective.”

HOW TO GET LOANS:
“I know that our banking group in general really respects a long-term relationship. The bank succeeds when the customer succeeds. If there’s one thing I’d like our customer to embrace, it’s we want your numbers to look strong, we want your financials to be strong. Nobody really wins when you don’t succeed. If we have thoughts and ideas to help, we’d like to have them be open to hearing those.”

Chris Bohl, Bremer Bank:

ACTIVITY IN 2012:
“It’s not as strong as it has been in years past. We’re seeing a lot of companies kind of get through the doldrums of the recession. They’ve been able to more effectively match their revenues and expenses to maintain profitability. But at the same time we’re not seeing a lot of expansion right now. A lot of people are waiting and seeing. They have a lot of plans, but they’re waiting.”

ADVICE FOR OWNERS:
“No. 1, business owners need to have a plan, to really have all the information available for the banker to review. It’s changed. Banks have been requiring more than before. What’s been amazing is many people’s memories are pretty short. They got so used to easy credit, and we got used to not requiring so much information. It’s kind of flipped.

The other piece is just being able to demonstrate that the business can continue and can afford to pay back the loan. If they’re looking to grow, do they have enough base that even if they take on additional debt, the existing business doesn’t have to necessarily grow to pay it back?

They have to demonstrate that there’s stability in the business. There’s no spec any more. If we buy it or build it, they will come-there needs to be more than that now.”

WHAT’S AHEAD:
“Do I think that there’s a bubble building? I do. People want to do things, but they’re very hesitant to take the leap. In that respect there’s a bubble building-they want to invest in their business, but they’re still very skittish.

At the same time I don’t believe that the economy has shown that it’s going to take off gangbusters, for there to be a mad ramp-up. I think companies will slowly get through it.