Guest post by Dale Gunther
The Clearwater River Valley in southern Alberta, Canada is known for having some of the most beautiful big game animals in the world. Every year sportsmen head to the Canadian Rockies to hunt in the beautiful valley. But they don’t do it alone. Most of them will enlist a guide for help. Many of the guides have lived, ranched and hunted in the area for decades. You wouldn’t want to head into the mountains without one.
A loan officer at a community bank is like a wilderness guide in that he or she can help you evaluate your readiness, prepare your materials and then actually advocate to the loan committee in your behalf.
Get to know your loan officer
It’s important that you develop a relationship with your loan officer, and especially that you help the officer to get to know you. At a big bank, you may only have numbers to represent you, but at a community bank the character of the borrower is an important factor.
Evaluate your financial fitness
Your loan officer guide can help you evaluate your situation and help you understand what it means to be in good financial shape for a loan. Because every business and every borrower’s situation is different, there is no simple checklist that I can provide as to what it means to be in good financial shape, but there are a few basic principles I can share.
All of the factors in considering the approval of a loan application distill down to the question of whether the applicant is likely to and capable of repaying the loan. Both business and personal factors play a role. Other issues such as length of time in business and net worth are not as important as this basic principle of ability to repay. Let me give you a few examples to illustrate this point.
A few years ago a man came into the bank to inquire about starting a new business. He had 20 years’ experience in cleaning ventilator hoods in restaurants and there was demand in the marketplace that was not being met. Often an SBA loan would be most appropriate for a start-up business, but this man ended up closing on a conventional line of credit. It turned out that he lived very conservatively in his personal life. His mortgage was paid down to about 40% of the home value and his monthly payment was low. This was his only debt, as he had no car payments, credit card balances or any other debt. Having low personal overhead meant that his new business didn’t need to make much profit in order to meet the needs of his family. He also signed a personal guarantee, using his strong base of capital (the equity in his home) as collateral for the loan. Several years later, this man has built a successful business. He used his line of credit for a short period of time, paid it off and has used it very little since.
On the other hand, let’s consider the story of another would-be borrower. This man wanted a loan to expand his business. His net worth was significant — about $1 million , but both on the business side and in his personal life, he was highly leveraged. He had borrowed heavily on real estate owned by the business and owned personally. His home also had significant value, but with a mortgage and a line of credit, he had borrowed 95 percent of the value of the home. The cash from this business was barely enough to cover the debt. He may have been optimistic about his ability to grow his business, but he had no margin for error. In a good economy, when money is plentiful and prices are going up, everyone can pay their bills. But if something happens and the income stream stops flowing or prices of real estate drop, this borrower is suddenly in a situation that threatens his entire financial structure with no back-up plan.
In the back country, one must be prepared for a variety of potentially life-threatening situations. There might be a sudden, unseasonable snow storm. The party might encounter a grizzly bear, or they might need to stay in the mountains longer than expected. If the group is prepared, these situations are not so serious, but without the right preparation, they can be life-threatening.
Taking on debt is a serious matter. An experienced loan officer who knows you and your business, will not only help you evaluate your readiness to take on additional debt, but he or she can help you put together your financials and your application to represent your financial condition in the clearest possible manner. When you are ready, the officer will then personally represent you, your readiness and your personal character to the loan committee, giving you the best chance for success.
Dale Gunther is vice chairman of the board of People’s Utah Bancorp, the holding company for Bank of American Fork , which is an Equal Housing Lender and Member FDIC. At the start of his 16-year tenure as CEO at Bank of American Fork, the bank had two branches and $80 million in assets; it now has 13 offices and more than $860 million in assets. Dale has served as chairman of the Utah Bankers Association and currently serves as an American Fork city councilman. This article should not be considered legal or investment advice. Seek legal and investment advice from your own qualified professional.