Lend it Forward

When earlier this year a headline in The Wall Street Journal called for bankers to pick up their lending activities, it reminded me that the message wasn’t aimed at smaller, closely held companies applying for loans. While many businesses have been able to offset the faltering economy with PPP government-backed loans, future lending among traditional institutions is less certain.
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Larry Gardner Headshot
Larry Gardner

When earlier this year a headline in The Wall Street Journal called for bankers to pick up their lending activities, it reminded me that the message wasn’t aimed at smaller, closely held companies applying for loans. While many businesses have been able to offset the faltering economy with PPP government-backed loans, future lending among traditional institutions is less certain.

Business loans and related funding opportunities are the lifeblood of our economy, and, in my opinion, banks and financial institutions need to do a better job of extending credit to long-standing, well-run companies. Our future success in Michigan and the country depends on it.

Consider the case of three recent local banks I dealt with in seeking out capital loans for our clients. The one thing that stood out at the outset was that banks were content to settle for “lower-risk portfolios.”

One local community-oriented bank (name not released) was looking for secured commercial loans with good collateral, demonstrated available cash flow, and adequate debt service ability, along with active, hands-on management with good credit history. I had, early on, pointed out to this bank’s senior vice president and head of credit that this request involved lending to three owned restaurants under the same corporate name — because banks, in general, can be leery of lending to a single-eatery operator.

In turn, I was told that if the $50,000-$75,000 line of credit request met the bank’s underwriting criteria, lending to the owner-operator of the three restaurants shouldn’t be a problem. What followed was a handoff to a junior loan officer who, in the credit evaluation process, asked for literally reams of historical and current financial information.

“Business loans and related funding opportunities are the lifeblood of our economy, and, in my opinion, banks and financial institutions need to do a better job of extending credit to long-standing, well-run companies. Our future success in Michigan and the country depends on it.”

Larry Gardner, President, Lawrence-Gardner Associates

A short time later, I was informed by the junior loan officer’s underwriting group that the loan application presented “a high industry risk,” and hence was declined. The decision came as the restaurant owner had underlying real estate (the three restaurants) that was owned free and clear; the only outstanding debt was two PPP loans granted on two of the restaurants collectively, not exceeding $100,000.

A second reason for the “risk” assessment was that the owner had “drained cash out of the business” to purchase a home, which my firm helped arrange via a mortgage through Troy-based Flagstar, which required a 20-percent deposit. The husband-and-wife owner/operators led a fairly frugal life, and getting out of their existing cramped residence was something they were planning for. As a result, we were told by the bank it was a negative turndown for approving the line of credit.

The second commercial bank in the Detroit area we approached was looking for qualified loans to extend to small- to middle-market firms. At the outset, the loan officer was optimistic about getting a $50,000 to $75,000 line of credit approved with no interest for 18 months.

After the bank received extensive financial information on the three restaurants, personal tax returns, and real estate collateral values collectively exceeding $800,000, the loan officer with years of commercial lending experience actively supported its approval to the bank’s credit committee (for up to $100,000).

After several weeks of answering requests for financial information, including actual pay stubs to verify wages to support their already submitted W-2s, bank statements of the three restaurants, etc., the credit request was declined because the bank’s underwriting group decided lending to restaurants was just too risky.

This came as the business, through a simplified menu, generates 98 percent of its revenue via takeout, and the bottom line actually increased following the end of Q2 2020. The owner also had a FICO score of 750.

At a third bank, which had been approached earlier, the recommended loan officer’s knowledge of banking practices proved helpful. Rather than a line of credit, Flagstar offered three bank-issued credit cards, one for each restaurant. We effectively obtained, collectively, a $39,000 line of credit with no interest for 20 months (via a bank credit card promotion as a backstop for originally requested working capital).

From my consulting perspective, and in dealing with prospective lenders, the “not too big to fail bank lenders” need to look at actual data and facts when reviewing and analyzing well-constructed and documented small business credit requests, rather than grouping them into a perceived “high industry risk” category.

In this way, more businesses would have a real opportunity to grow their operations, add workers, and further support their communities

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