An interesting interview with Mr. Betar,
Business Relationship Manager
at Service 1st FCU in Lewisburg, Pa.
I thank Mr. Betar for his time and expert input.
Here is the recorded interview:
Doug Betar’s Recorded Interview
or, read a more complete version:
What is the first thing a business owner needs to do if he/she expects to seek a loan in the near future?
Build a Business Plan
Determine the strengths and weaknesses of the plan
Shore up the weaknesses
Are there differences in documentation in the application process from the bank’s and business’ perspective between new (fewer than 3 years old) and established businesses?
Few if any from a documentation perspective except for historical financial records
Are personal guarantees “automatic” with some types of loans?
Personal guarantees are pretty much an automatic one loans to privately held business entities. Guarantors are required if a person or business entity own/has an interest 20% or greater of the business;
If a business person is borrowing in their personal name, guarantees are not required
What are they lending options if a business was established using the personal assets of the owners and is now close to generating cash flow, they have a signed deal with a customer but need working capital?. They have no additional collateral remaining outside of the business.
This is a double edged sword. Naturally financial institutions are looking for collateral, to go along with the character and capacity, form the business borrower.
-As the business gets stronger, those personal assets may be replaced with business assets if tangible assets (RE, Cash, Fixed assets, A/R) are available;
-The use of a contract from a customer can be used provided the financial institution believes and can possibly verify:
i) The business can perform and meet the contract requirements;
ii) The receiving party is a reputable company;
iii) Is financially solid enough to sustain their business in the economy and pay for the
contract from their end; and,
iv) the contract is assignable to the financial institution
Does business experience factor into the risk equation?
Business experience does factor into the equation. We look at
Experience within that certain business/industry;
Experience with running/operating a business;
No experience at all
How big a role does the “relationship” play in convincing a bank to take a greater risk with a business than dealing with a new customer?
Prior relationship between the lender and borrower does play a role in risk.
Naturally, if the borrower has:
A business successful borrowing lending background with the lender, that carries more experience weight;
A successful personal borrowing background carries some experience with the lender, though personal and business borrowings are two separate and distinct types of borrowing
Are there third parties other than the SBA which can be brought in to serve as a guarantor of a loan – not associated with the borrower or his/her business prior to the loan?
The only other federal agency guarantor that comes to mind is the USDA.
There are also the possibilities of guarantees from agencies at the state and local governmental levels, you should check with:
State department of banking,
State department of commerce; and,
County and municipal economic development agencies/authorities
Are officers of a company who are not owners ever asked to serve as guarantors?
Not as a requirement in my experience. However, I have had non-owner officers “offer” to guarantee if it made a difference. You just need to be careful with this as the guarantee might not be enforceable if it can be proven that the guarantor received no direct benefit from the guarantee.
If a business has five partners sharing equally in ownership (20% each), do they all have to act as personal guarantors if personal guarantees are needed? How much do they each guarantee – the whole loan or 20% per owner?
The usual cut-off for a guarantor is 20% of more ownership interest in a business. So, yes, if the partner owns or has an interest in 20% or more of the business they will be required to guarantee.
Most guarantees are jointly or severally…meaning everyone guarantees up to 100% of the loan jointly and individually. Limited guarantees, where owners only guarantee a certain portion of the debt not its entirety, can be done and could be look at on a case-by case basis
Do lenders ever require a business to bring in an experienced business person – as an owner, director, officer, or consultant – to ensure that the business has the management capability and a better chance of succeeding?
Yes this can be done. However, this does change the financial dynamic of the loan request and business plan, so adjustments would have to be made.
If a new business is started by individuals who have no assets, poor credit, and no business experience, what options if any do they have to get a loan?
In today’s economic world…little to none. New business individuals would probably be considered non-bankable under these circumstances. They can look to borrow personally and infuse their own money into the business. Look to SBA or USDA guarantees and/or look for venture capitalists or a benefactor to infuse capital into their new business.
What are some of the risk factors that anyone seeking a loan can reduce prior to making the loan application?
It is not necessarily a matter of reducing risk factors before making applicartion but having a strong plan, capital, collateral and good credit. The stronger these items are, the stronger the loan application.
Is it wise to deal with banks one at a time or is a shotgun approach better if you don’t have an established relationship with a bank?
In today’s world, unless you plan, capital and collateral are strong, should be shopped to get the best deals as possible. You cannot limit your options in today’s economic environment. Additionally, if financial institutions know they are competing for a deal they want, it helps the borrower by making the prospective lenders “sharpen their pencils” so to speak.
How do credit cards – even those without a balance – impact a loan application?
Credit cards, even with no balances, do bear on a credit request. If a borrower has 3 credit cards with a $5,000 credit limit each, I must consider what the cash flow requirements are for the entire deal if these cards are fully extended, even though they have a $0 balance. The limits are still available and must be repaid. So they must be considered.
If a person has previously filed bankruptcy, does it prevent them from getting a loan or increase the risk and consequently the interest rate?
In most cases it does increase the risk, availability of funds and the interest rate. That said:
-The amount of time since the bankruptcy;
-New credit successfully established and paid since the bankruptcy; and,
-Settlement or repayment of restructured debt from the bankruptcy and its full discharge, can provide some positive to mitigate this issue.
If a business owner decides to apply with many different banks for loans, is there an adverse impact on their credit rating just from applying for the loans?
Each time a credit report is run, there is a small hit to the credit score. However, if the borrower explains that they are shopping their request to different financial institutions that issue should not be a problem.
What services are available – directly from lenders or from other businesses – which improve the chance of getting a loan or the terms of the loan?
Services provided by the Small Business Development Centers (in PA);
Services provided by the SBA; USDA;
Grants and revolving loan funds available through county and local municipal governments;
Assistance through regional and county economic development authorities
If an applicant is turned down for a loan, how can he/she regroup and come back to try again – how long should he/she wait and what actions do they need to take to improve the application?
After a turn down, a borrower can come back at any time. There are no restrictions as to how much time should pass before re-submitting.
The actions to improve the application are basically addressing the area of weakness where the lender declined the loan, strengthening and/or restructuring them for submission
Credit history of the business and/or the owner(s) plays a heavy role in assessing risk, how do lenders use the score? Is collateral the only “offset” to a low or poor credit history?
A majority of lenders just look at the credit scores of the individuals involved. If the scores are in the acceptable range, that is a plus. If not, it is a major detriment. The rule of thumb is…”if a business borrower cannot manage their personal credit in a satisfactory manner, then they will most likely manage their business financials in the same manner.”
Strengthening a loan from a collateral standpoint is the primary way of overcoming a low credit score or poor credit history
If someone is considering starting a business, what foundation is needed – relationships and credit standing – before they start the business?
They need:
A good plan;
Experience or expertise;
Capital backing and to run operations initially;
Collateral;
Good credit;
Strong work ethic
