What business lenders are looking for now

Just as businesses need credit the most, banks are becoming more conservative in their loan approvals.

Financing is still available for qualified borrowers, however, and interest rates are holding fairly steady. Documentation of past performance and articulation of future plans are the names of the game for getting approved in this environment.

“It’s not dissimilar to what is going on in the mortgage world,” explained David Miller, a financial consultant with the Shaw Miller Money Group of Boulder. “Every detail in the loan package has to be verified.”

Miller helps clients compile the documentation for loan applications and points them toward the institutions most likely to extend credit. Increasingly, banks are becoming more reluctant to accept risk, he said. “Only the most qualified borrowers are going to be approved. They had better have a strong background. Personal credit history should be clean.”

Pat O’Brien, Boulder Area Community Banking President for Wells Fargo, agreed that lenders in general are reacting to a declining economy by looking at loan applications with a more critical eye. He said Wells Fargo has not changed its approval process, nor its availability of funds for business loans.

“We underwrite today how we did five or 10 years ago,” he said. “We have a clearly defined credit culture that we’re well trained to use effectively to grow commerce.”

Wells Fargo offers several loan products for businesses: revolving lines of credit for operational funds, term installment loans for equipment purchases, mortgages for owner-occupied commercial buildings and Small Business Administration-backed loans.

First and foremost, O’Brien’s business bankers consider an applicant’s cash flow.

“We try to match credit exposure and the type of credit we extend – revolving lines of credit or term loans – to fit comfortably underneath the cash flow of the business.”

Next, O’Brien said Wells Fargo looks at an applicant’s collateral and existing debt – “Do they have a comfortable level of leverage relative to their peer group?”

Finally, his bank looks at the structure and strength provided by the personal guarantors on the loan. In addition to personal assets and credit scores above the mid-600s, bankers want to see a level of industry experience in the guarantors that inspires confidence.

The experience and financial strength of the personal guarantors plays an even bigger role in SBA-backed loans, which are often approved based on projected cash flow. These loans are a good option for startups or businesses with a short track record.

For its other business loans, Wells Fargo likes to see three years worth of tax returns and financial statements, both corporate and personal. Depending on the business, they may also want to review inventory and accounts receivable reports.

“This is a custom approval process,” O’Brien said. “There are a lot of intangibles.” Although they don’t require a “Harvard Business School” business plan, O’Brien said, it’s important for applicants to be able to articulate how their business model is unique and why it has a high probability of being successful.

One of the biggest mistakes applicants make is not being fully prepared.

“It’s important for them to understand the types of loans available, to show they’ve thought about the purpose of the loan and can outline how they will repay it,” O’Brien said.

Unlike mortgage rates, O’Brien said that business loan interest rates have not decreased as might be expected, following the decrease in the prime rate.

“Overall risk has gone up, and the Federal Fund Rate has gone down – there’s a disconnect,´ said Frank Amoroso, a Broomfield-based senior relationship manager for Silicon Valley Bank. The Fed rate was decreased artificially in an attempt to stimulate the economy, he explained. But the risk to lenders continues to increase as the economy contracts. As a result, businesses have seen the cost of capital increase slightly.

But funds are still available, even for startups. Amoroso works exclusively with early-stage businesses. “We’re lending to preprofit companies. It’s not easy to do this successfully – we’re unique in that regard,” he said.

SVB only services clients in its target markets: high tech, biosciences, private equity and premium winemaking.

“We’ve seen people jump in when the market’s hot, and out when the market goes south, like in 2001. We’re in it for the long haul, and it’s served us well over the past 25 years.”

If SVB’s industry niches are the target, then the bull’s-eye for Amoroso’s loan approvals are companies with defensible intellectual property and institutional equity sponsorship, in other words, venture capital partners. He also looks for an ability to raise successive rounds of financing.

As his job title suggests, much of Amoroso’s vetting process involves the relationships with the principals of companies and the investors providing capital. He works often with what he affectionately calls “repeat offender CFOs” and “start-up junkies” – individuals who have been involved in previous enterprises.

Past failures are not necessarily a deal killer, as long as they “did the right thing” in regards to their lenders and investors, Amoroso explained.

The loan approval process is highly qualitative, rather than quantitative.

“We don’t do template underwriting,” he said, adding, “I don’t even know how to run a credit score.”

His startup clients are so dynamic that he has accepted that he won’t always see a “fully baked” business plan. Amoroso also takes financial projections with more than a grain of salt. “In 17 years, only twice has one of my clients upwardly revised them.”

He would, however, like to see a company’s list of copyrights, patents and trademarks. This intellectual property provides a certain level of comfort that there will be some enterprise value left to a company if it burns through all its cash.

Amoroso explained that SVB does not loan directly against the perceived value of the intellectual property. “We are not technologists at SVB. The venture capitalists are vetting the technology. Our model allows us to piggyback on that due diligence.”

Although SVB is not involved directly in equity investing, its Venture Exchange program often serves as a sort of “dating service” for clients and the venture capitalists in its expansive network. “We make the introduction – a warm, fully vetted introduction to parties we know quite well.”

In his 17 years of experience at SVB, Amoroso has found that many entrepreneurs “come looking for loans when what they really need is equity.” Debt should be used to finance assets, equipment and inventory, he said. “To finance expenses from debt is not a good idea – not anymore.”