Behind the Banker’s Door – How We Got Here
Banks and other institutions get sloppy during periods of extended (credit) expansion. New markets, business mergers, vested stock options and the philosophy of GAAC (growth at any cost) seem to be the focus. Paperwork is given short shrift at best.
Like, you didn’t already know that, right?Those who are seen to "produce" (loan officers, executives, etc.) for the bank are rewarded generously; this will not include any of the "paperwork people".
This is a good time to be a borrower.
Money flows freely and often small cracks in your credit profile (or Fair Isaac score) are ignored. Of course, during this period nearly all credit flaws are small ones. If you can fog a mirror, you can get a loan.
But when a “credit squeeze” or “slowdown” threatens (or actually occurs) everything, especially those activities that take place behind the business curtain (backroom function), comes to a screeching halt.And things can get ugly quickly.
One reason for this is those “backroom folks” are usually the last to be hired or rewarded but the first to get a pink slip. It’s only after they’re gone someone eventually asks the crucial question — where did all the loan docs go? (best sung to the tune of “where have all the flowers gone?”)This is when funding percentages begin to change dramatically. Many may be called (to try to refinance, etc.) but few are chosen (to actually close a loan). Truly high growth areas may not see much of this, but it is still happening right under their noses.
This is when funding percentages begin to change ++dramatically++. Many may be called (to try to refinance, etc.) but few are chosen (to actually close a loan). Truly high growth areas may not see much of this, but it is still happening right under their noses.But there will be some that fortuen continues to smile on - nobody can find their docs. Anywhere.
Not the initial loan, not the secondary paperwork (shifting responsibility to someone else), nothing. Now what?
Upstream lenders, regulators, and the headquarters have been known to be most unforgiving to anyone suggesting that paperwork is no longer in their possession.
And you don’t even want to know what happens if they actually find out the paperwork was NEVER done. Often, lending privileges are restricted (if not extinguished) and sooner or later, a new lending officer emerges.
Behind the scenes there is much anguish. “Paperwork teams” are sometimes recruited to fly around gathering paperwork, rewriting docs, etc. and are usually just ahead of internal (or federal) auditors. At least, that’s the plan.
Please note that no banking institution will admit to this perverse cycle.
Trust me, it happens all the time.
I’ve personally witnessed it in the ’79-’80, ’86-’88, ’90-early 93, and 2007-08 until today? I see signs of it happening all over again everywhere.
Remember the old real estate proverb about our business consisting of ten year cycles and people with five year memories? It takes both for it to work, doesn’t it?
These times are good for me. Bargains abound.
People often move quite quickly from concern to panic and I am paid handsomely to show them to the exit door. Sort of a toll booth on their way to financial peace of mind.
I should note right here that I went straight. I have never been nor do I aspire to be a banker.
But I need them and I understand them. Kind of a predator-prey relationship (and not the way they think) at times, but it can even get warm and cozy at others.
One more thing, this cycle can and does occur when banks buy out (or merge with) competitors too.
Outwardly, great pains will be taken to illustrate that “nothing has changed”. But this is far from true.
The new institution will always become a clone of the successor. The relationship you had, or thought you had with your loan officer, executive, etc. is now out the window. They serve a new master now.
And those who cannot or will not serve willingly have to go elsewhere. Don’t let them take your credit line (or relationship) with them.
There are four steps to working with banks; they are: choosing the correct bank, developing a relationship with them, preparing and presenting your loan or project proposals correctly, and maintaining the relationship you’ve worked so hard to build.
If you follow these four steps, you should be able to find all the money you’ll ever need to complete your deals.
Earlier this year, a reader wrote to the Freakonomics blog site to ask why his bank wasn’t willing to give him (and his partner) a loan in the amount of $50K – even though they offered to put the same amount of cash into the bank.
While most of us aren’t usually willing to put up quite so much money to secure loan, this illustrates the problem of obtaining business credit in America today.
To make a long story short ( and you really should click on the link and read the story for yourself ), the two offered to put up $50K (cash) in order to get the same amount back as a loan. They hoped this would help build their credit rating and their relationship with the bank.Didn't happen.
Instead, after much delay, their loan officer came back with the news that the “underwriters” wouldn’t approve anything more than $25K - regardless of the amount or type of collateral!
The original poster asked why the bank would not loan them money when they had offered the entire amount to the bank as collateral. One of the authors of the Freakonomics blog asked the group whether this was an unusual circumstance or not.
Sadly, it is not. Scenes like this play out in banks all across this country every day.
There were many responses to the website; most of which ranged from the fanciful to the totally unhelpful.
A few posters responded that the bank wasn’t truly secure even with the cash tucked securely inside their vault.
Some ventured that perhaps, under certain circumstances, the bank might experience a loss (of some kind); that’s why they only offered fifty percent of the amount.
Others thought this might be just another ploy to scam the bank out of its money – although how getting a cash deposit of $50K would in any way harm the bank or why these folks would pledge their own hard-earned cash just to try to “rip off” the bank in some way was never really explained.
The truth is that most people will never find themselves in this position and don’t have any experience with banks or bankers.
The truth is that most people will never find themselves in this position and don’t have any experience with banks or bankers.
If you’ve got an ordinary 9-5 job somewhere, work in academia, or as a civil servant, you really have no business offering advice in this situation.
As in zero, zip, nada.
If you’ve never had to ask for a business loan, then you probably don’t get it. For most small business people (the majority of whom are also “self-employed”), the world of banking can be a scary place.
And while newspapers and talking heads on TV like to talk about “credit easing” or “credit tightening”, those terms don’t really mean very much when you’re sitting outside the loan officer’s door hoping to make payroll, fund a closing, or grow your business.
“So what did you tell them?” my friend asked.
“Stop the truck and I’ll show you.”
He pulled over in the shade of a large live oak and I pulled the website up on my phone. Handing him the phone, he began to read my answer.
”You got the typical “Big Bank” run around. They love to take deposits, but aren’t interested in making loans – especially small business loans. The bit about the underwriter is pretty much all “BS”.
Here’s the deal:
1. You picked the wrong bank;
2. You have the wrong loan officer
3. You made the wrong pitch; or
4. All of the above.
I put my money on number 4.
Research your bank – not all of them actually make loans, you know. Check with a local insurance agent, they can usually tell you which banks are more “business friendly”.
Research your lender. Call reports are public information. If I saw too much fed funds, gov’t paper, or anything other than loans, I would be taking my business elsewhere.
Refine your pitch. Why do you need the money? What is the primary collateral? How will you repay the loan? And my favorite – If all hell breaks loose, how will the bank be repaid?
In other words, what is your secondary form of repayment? Formal “take out” agreements (preferably from well qualified clients of the bank in question) often work well as do compensating balances (banks love to play with client money – as if you didn’t already know this).
Just make sure you understand your proposal as well or better than the banker. That means you should be able to secure releases of that collateral when you’ve proved yourself (as the loan performs).
From your letter, you have the right pieces. Just put in a little more thinking, practice a bit, answer all the questions, and make sure you choose your target (lender) wisely.
You may think banks act logically and base all their decisions on numbers, but that isn’t always the case. In fact, I would suggest that you run away from this bank as quickly as possible.
You will never be a first class client of a major (or regional bank). You are simply too small to be worth the trouble.
They are trying to tell you – in banker speak, to go away. Pay attention. This may be hard to accept, but true.
Take your business to a bank that can make loan decisions locally. Trust me, you will be much happier.”
“You’re saying the bank didn’t want their business? Did anybody else say that?”
“Nope, just me,” I said.
“Why didn’t they catch on?”
“They had no relevant experience. Plain and simple.”
If you’re someone who depends upon banks for your daily bread, who knows what it’s like to have the door slammed in your face despite your best efforts, or whose line of credit is as important to them as breathing, you need to careful where you get your advice.
How you approach the bank, how you present yourself and your loan proposal - even how you choose which bank to use - all are of critical importance. Make the wrong choices and both you and your company will suffer the consequences. Choose wisely and you will happily live to work another day.
“I wish I could believe it was that simple”, he said.
“It is simple – it’s just not easy. There’s a lot of work involved so most people just decide not to bother.”
“Think you could show me?” He said.
“What would that be worth to you?” I said.
“How about I buy you lunch in town, but I get to pick the bank.”
“Didn’t I just get through explaining all the reasons you should choose which bank to work?” I said.
“A hundred bucks says you don’t get past the first desk” He said.
“You, my friend, have a bet. Just make sure you have the cash ready. I don’t take credit cards.”
Economic Climate Change Ahead
Recently, a friend and I were having one of our many discussions about the banking system in this country and the problems facing business people today.
We talked about the need to research your bank before you ever present a loan request, the importance of having a Plan B to share with the bank (and loan officer), and even my fondness for call reports among other things.
He reminded me that I should make more of an effort to define my terms.
“Tell ‘em what you mean and why it’s important,” He said.
He was right, of course.
Right, for example, about the call reports which are federally mandated and consist of a “snapshot” of an institution’s finances.
Call Reports, or as they are formally known, “Consolidated Report of Condition and Income” for banks and the “Thrift Financial Report” for Thrifts have to be filed after the end of each quarter and can be amended up to 30 days after that.
Credit Unions file their own quarterly call report with the National Credit Union Administration.
These reports collect basic information including balance sheets and income statements and are filed with an intermediate agency, the Federal Financial Institutions Examination Council, which then coordinates with FDIC, the Office of Thrift Supervision, and the Federal Reserve.
Most people have no idea these reports even exist – much less what they mean or represent. I’ve even scored points with bankers over the years by asking for it by name.
More than once I’ve been told I was the only person who ever asked for a call report (back when they were actually printed and not on-line). Even so, the idea of including a more detailed definition is a good one and I’ve done that here .
His points about “Plan B” and new borrowers are also very important.
“Secondary Source of Repayment”; and not “Plan B”, is the more professional term and we both agree that bankers put more weight on that point than most would ever imagine.
He believes that’s due to “capital” issues – meaning more is always better. And though I agree, sometimes I also believe it has to do with the prospective borrower actually taking the time to think through the entire proposal and making the effort to put it all down on paper.
From a banker’s perspective, you are indeed “thinking things through” and you’re also helping them save face (not a small point) when they later present your loan proposal to their peers, the loan committee, or to superiors. Believe me, no one wants to look foolish.
Which brings me to the part about new borrowers: Looking foolish, lax, or being accused of not following standard lending guidelines or procedures is definitely not something any banker aspires to – especially in today’s politically charged economic climate.
Big name Wall Street players may commit outright fraud and walk away unscathed to play another day, but your local loan officer, bank president, or board member will not. Often the slightest taint of “foolishness” will end a career.
Remember: Bankers don’t get fired for refusing to fund your loan, calling your credit line, or asking for more collateral than is necessary. Nothing personal – it’s just the job.
I often think of a Discovery Channel program I watched long ago.
The film crew followed a large group of penguins for most of the breeding season somewhere near Antarctica. Not surprisingly, the migration of penguins is followed by a similar migration of sharks who fully intend to make a living from unlucky penguins.
Though the penguins spend most of the time on shore near the hatchery, they must enter the water to feed. The sharks have only to wait and their dinner will come to them.
Desperately hungry after nurturing their young, the adult penguins gather at the edge of the ice shelf and peer anxiously into the dark water below for any sign of danger. Finally, the group “selects” a volunteer by shoving it into the sea. These days, you may recognize this process as a form of “crowd sourcing”.
Should that impromptu flop into the water draw an immediate reaction complete with teeth, blood and floating feathers, the hungry crowd will wait only a few minutes more before selecting the next volunteer.
This process continues until the sharks grow tired of picking feathers from their teeth and contentedly swim away with a full belly or looking for a dessert menu.
I’m betting your average banker feels a bit like those penguins these days. And to think, just a few short years ago, s/he was convinced they were the sharks!
The process of penguins being “selected” as lunch is very much like that of taking on new customers for banks and bankers who have yet to determine whether or not their particular sharks – the economy, regulators, and larger banks – have had enough to eat.
As a defense, bankers do have one option open to them that penguins do not – they can just say “no”.
Navigating your way through all this mess is a nightmare if you don’t know anything about banks, lending practices, regulatory pressures… or sharks.
Getting the money you need to meet payroll, to acquire a competitor, or to buy a piece of commercial real estate involves the skillful navigation of a process – a process with a lot of moving parts. But it is a skill that can be taught.
And regardless of your experience, your position, your track record or credit score – it’s definitely something you need to learn. You can improve your skills; take charge of the process, and close more deals.
Think of it as money in the bank.
Main Street, U.S.A.
“You owe me a hundred bucks – and a meal,” I said as we stepped out of the bank into the 105 degree heat of the Texas summer sun.
Grinning, I walked over to my friend’s pickup and stuck out my hand.
“Nope. Not yet. I want to know how you did it. I’ve been trying to get a loan from that bank for three years. So, if I’m going to buy you lunch and give you a hundred bucks – I want my money’s worth.”
“Let’s do it,” I said. And I climbed into his truck and off we went.
Banks have been all over the news lately. Big bank bailouts, small bank failures, Wall Street bankers and their outrageous bonuses.
But none of that seems to matter when you’re sitting in the lobby waiting on a loan officer to give a thumbs up or down on your future. What’s that got to do with getting the money you need to grow your business anyway?
Of course, the real world answer is “it depends”.
If your credit needs are minimal (house, car, credit cards) and you are using a credit union or small community bank, the impact of all that credit tightening you hear the talking heads on TV chattering about may not be clear to you.
On the other hand, if you are a small fish in a big pond, say … at Bank of America, Wells Fargo, Citibank, or Chase, you may have already experienced some or all of the following:
- Your long-standing credit line was called unexpectedly;
- Previous loan commitments were postponed, canceled, or worse, you were asked to re-submit the whole thing again;
- Loans, though not in default and sometimes in place for years, were called with little or no explanation (other than they could); and
- Obtaining new credit anywhere appears to be impossible.
Sorry to say that none of this is new. You may be outraged to find that nobody cares about your small or mid-sized business, but the fact is they don’t.
If your revenue exceeds the 10 million dollar mark, you may be able to get – and keep – the attention from some of the lower ranks of bank executives at one of the big regionals or occasionally, a national bank. But I’d argue that even then, you may not be well served at that institution.
At the same time, if you are successful and don’t have 10 million or more to throw around what do you do? To put it simply: find another bank.
Sure, for those closer to the magic number of 10 million, a regional bank will probably fit the bill, but the vast majority of folks out there who need a mere million or so to fund their next acquisition, expand their distribution line, or buy industrial equipment will still need to look elsewhere. Nice to know that the “big guys” will be there right along with the rest of us, isn’t it?
How do you find a bank that will listen?
The simple answer is to choose your bank well and more importantly, you should speak in language they understand.
How to go about selecting the correct bank and what language you should use are topics we’ll discuss later in more detail, but recognizing the proper frame of mind in which to approach the bank is important too.
In fact, let’s take a minute or two to talk about what you want to avoid.
To be clear, you:
- Do not want to be sitting in the bank’s lobby on Monday morning desperately trying to get a loan to cover the checks you wrote the previous Friday afternoon. Needing money quickly will be taken as a sign of desperation and as any salesman can tell you, that won’t make you or your project more attractive to your target.
- Do not want to deal with people you don’t know and who don’t know you – if it can be helped.
- Do not want to work with anyone “experiencing” his or her first day (or year?) as a loan officer.
- Do not want to appear disorganized in front of the banker
- Do not want to be the least bit unclear as to your needs.
This is the time to step up and be a part of the 1 percent and not the other 99 percent who do all of the above. In other words, you need to stick out – in a good way. But there is some homework to do first.
Before I even think about submitting a loan proposal, I like to get to know my loan officers (and the bank execs) and you should too.
What I mean is that you should know a little about their hobbies, where they went to school, their children’s names, what their interest are, etc. Often, you find that banking is a small world and many of the people you’re getting to know will have grown up in the business – meaning they have relatives in the banking too.
Sometimes, you’ll discover things you didn’t expect such as unique hobbies, interests, or goals. Once, I met a man whose hobby was hunting rattlesnakes for area round-ups. The point is that I make it a point to discover something about them that no one else knows.
I also make an appointment to see the loan officer/bank exec at a time when it’s convenient for both of us. If this is someone new to me, I’ll drop by with a business card inside an envelope explaining who I am, my business, and my interest in seeing him/her. I find that a card inside the envelope will usually stick around where a business card alone often gets tossed into the nearest trash can as soon as you leave.
By the way, this is a great time to put a reference letter or two inside that envelope. Letters from (bank) board members work well, but letters from other banks in other cities work best of all.
You did know they were going to check you out, right?
Hey, if you haven’t got any references – it’s no big deal. But you should make getting a few good references part of your long term strategy. Trust me, it will be worth the trouble.
One more thing – you might try to think of the process of submitting a loan proposal as a “sales call” and treat it as such.
If your prospect, the loan officer, seems busy or distracted then set another time to come back when you can have their full attention. And remember, sending your proposal by email or by fax may be convenient for you, but unless you own the bank – you’re not likely to have a successful outcome.
On that first appointment, I’m careful to ask about the bank, the loan officer’s experience, and often, the contents of their latest call report. What I’m doing is making sure I have the correct “fit” with the bank. The selection process may have already narrowed the field considerably, but nothing takes the place of personally checking out the place and the people.
Remember: this is not the time to ask for a loan.
Instead, you should bring up what you do – real estate, beauty salons, kiddy balloons, whatever. You can also talk a little, and I mean very little, about your plans for the bank.
Again, make like a great salesperson and listen. As in, L-I-S-T-E-N.
Back to your introduction speech: You only want to introduce the loan officer to your expertise, not your project.
Something along these lines may work for you -
“Currently, I’m working with a group of investors to acquire some multi-family housing projects in your city (area, county, etc.) and I would like to explore the possibility of working with your bank on some of those acquisitions. (Pause) If I drop a loan proposal by your office, is there any reason you wouldn’t take a look?” (Wait for an answer. Say nothing until you get one.)
Hint: You should already have determined that this bank does indeed like to loan on Multi-Family real estate or whatever your project is about. If you’ve done your homework and get anything other than “sure”, you need to head for the door and look for another bank.
At your next appointment, you should have your loan proposal in hand with extra copies for your loan officer, his compliance department, and a couple for the loan committee. Personally, I prefer to use a spiral bound presentation format, with a cover, and tabbed sections for each logical part of the project.
Don’t worry, if you don’t have time to make extra copies, concentrate on making the one you give your loan officer the very best you can. I can’t emphasize enough just how important this is.
Early in my career, I made a presentation to a bank in Houston. Although the loan was approved, the bank was merged with a larger institution before I could get my project off the ground.
Years later, I was helping a friend with another bank deal when suddenly the loan officer excused himself and went “upstairs”. He was back in just a few minutes with the bank president and a few other bank officers.
In his hand was that presentation I’d made all those years earlier. In Houston. Over 350 miles away. To another bank and banker. These things can sometimes take on a life of their own.
Then and there I made the decision to stick with the spiral bound presentations for one simple reason – if I was going to spend this much time and effort, I didn’t want anyone else “adding or deleting” sections after it left my hands. A three-ring binder is OK, but it does leave you and your presentation open to unauthorized “editing”.
Back on point: In every case, the bank will want to know the answer to five questions:
- How much money do you need?
- When do you need it?
- What are you going to use it for?
- How will you repay the loan?
- If all else fails. how will the bank protect itself, its capital, and its profit? (Also known as Plan B or as we’ve learned – the secondary source of repayment).
Write your answers down in complete sentences on no more than a page or two and package it together with your backup materials. Just as in grade school, neatness counts.
Again, make separate sections describing as much of the proposal as possible – surveys, improvements needed, zoning change requirements, etc.
Important: The very first section should be an informal letter from you to your banker outlining the answers to those five questions listed above. It needs to be concise and to the point.
This one piece of information will be your loan officer’s “cheat sheet”. When answering questions about your proposal, this letter will be their main reference. Everything else is to support this document.
Don’t make him/her search for relevant details about your proposal. And do not make him/her look foolish in front of their peers and superiors.
The last point, you know the one about Plan B? It’s probably ~the~ most over-looked item and is almost as important as the initial letter. Still, almost everyone ignores it.
This is where you make it very clear to the bank that you take their position seriously. You expect them to make the loan which will be repaid – out of your alternate resources, if necessary.
Doing your homework and preparing your documents will give you a newfound sense of confidence. And as we all know, confidence breeds confidence.
Being sure of your project’s numbers and your presentation will go a long way in making the bank sure of your project, your performance, and you.
Here’s the deal: Almost every single person asking for a loan will include sections on their financial projections, their project, and even their chances of success (also known as a “financial projection)
All that is well and good,
… but where you have a real chance to stand out is with the cover letter and in offering the bank a secondary source of repayment.
Most bankers I know can count on one hand the number of “complete” loan proposals they’ve reviewed over the years – and most bankers review hundreds, if not thousands in their careers.
While some of you may feel this is taking it a bit too far, I don’t.
The point of this exercise is to move you and your project to the head of the line and past all those people sitting nervously outside the banker’s office.
Remember, they need to cover those checks!
It’s not necessary to be the perfect loan candidate, but it is easy to stand head and shoulders above everyone else. And that’s the point.
Most of us have heard the old joke about two attorneys hiking in the woods. Spotting an angry bear heading in their direction, one begins to wail and moan about their impending doom while the other begins to take off his hiking boots and put on his running shoes.
“You can’t outrun a bear, you fool” shouts the first attorney.
“Don’t have to outrun the bear” said the other.
“Just have to outrun you.”
Point taken. By now you should be able to draw the connection between the punch-line of this joke and making a successful loan proposal.
Back at the ranch, it’s late in the day. My friend and I are seated outside on a shade-covered patio watching fish swim lazily by in the clear water below.
“Is that all there is to it?” he asked.
“Not at all. But that will get you started and it will get you a lot farther down the road than most people ever get.”
“What about the rest?”
“Well, there’s more to learning how to choose your bank properly. And how to use language so the banker can understand you better – I call it “Banker Speak”.
“In addition, you need to know about developing the relationship, how to maintain that relationship, and even how to work a backup plan. You know, everybody needs a backup plan sooner or later.”
“What else do I need to know?”
“A bunch. We can talk later. But I have to tell you, it’s going to cost you more than lunch,” I said.
“How about I put on some steaks and you stay up at the lodge for the weekend? I need to understand why it makes such a difference.
“And you can help me check the water lines as we ride around this afternoon and tonight, we’re doing a deer survey. So don’t think you’re getting away any time soon,” he said.
“OK. I’d like that. Let me get changed and you can pick me up in 30 minutes or so and I’ll tell you how I got started.”
“Deal,” he said.
Back in my ranching days, I learned an important lesson from a cattle buyer friend of mine. He was on the phone with a client who was upset about the quality of a few animals in a shipment he received (of several hundred).
After the call was finished, I asked my friend, “What’s the deal?”
He replied, “Some people never learn that there is a top and bottom in every load.”
What he meant is that every grouping of more than two objects will have a “best” and a “worst” – a “top” and a “bottom”. Regardless of how carefully your selection process is, that’s how you’ll end up.
Years later, when I began to court Banks and S&L’s in earnest, I learned the importance of doing my homework and asking the proper questions to take advantage of my friend’s insight.
You need to understand that even institutions which literally had Federal Marshals at the door would usually deny, or trivialize the fact that they had REO’S, repo’s, defaulting loans, etc. Instead, much like most people facing foreclosure or bankruptcy, they enter a state of partial or complete denial.
And while we can all sit around and wonder how anyone could be so foolish, that still doesn’t move us any farther down the road.
What did work was to ask them quietly (and in person) — “What’s the one thing you’d like to see off your books today?”
The bottom line is that every bank has a “top and bottom” sitting in their portfolio, on their books, and on their minds. And every banker has something they would like to see gone — right now, if possible.
For whatever reason, this question (or one like it) usually broke the wall of silence and we could move on from there. That one idea from my friend made me a lot of money (and it still does today).
It bears repeating that variations of this theme occur throughout the business world every day. Even so, I was advised (by many) early in my career not to bother with large companies or institutions. “They’re too impersonal” I was told or “They don’t have problems”.
Nothing could be further from the truth.
Institutions are a reflection of the people that run them; they experience fear, greed, uncertainty, and arrogance just as much as any flesh and blood person. Whether it’s Lehman, Bank of America, J.P. Morgan, or the corner grocery store doesn’t really matter.
Riding in the truck, chasing down yet another water leak, my friend spoke up for the first time since we left the lodge, “What’s all that got to do with me getting a loan?” he said.
“Everything,” I said.
“Remember that top and bottom part? You don’t think it applies to people asking for loans? You don’t think your banker ranks those folks and their loan requests?”
“Your job is move beyond the competition and become as close to a perfect candidate with a perfect loan proposal as possible.” I said.
Here’s the deal: you and your loan request will be measured and compared to every other proposal that comes through the bank’s doors. Why not use that to your advantage?
You probably tend to think in terms of only your loan proposal, but how many of those things do you think your banker will see today, this week, or even this year? Trust me, there will be a “top and a bottom”, a “best” and a “worst”.
If it helps, you can think of your loan proposal in terms of an audition for American Idol.
How are you going to win over Simon?
And, trust me on this, there is always a “Simon” on your loan committee sitting behind closed doors making notes and criticisms of you, your proposal, your loan officer, - none of which will you be able to respond to directly.
So, the simple thing is just to take “Simon” completely out of the equation and make your presentation stand out in such a way that all the “judges” give you the go ahead to the next round.
At that point, my friend spoke up, “What if your deal is so good, they would be silly to say no”.
“Just how good?” I asked.
“Well, what if I had as much or more money in the bank than I need for the loan?”
“You’ll make their day. After all, there’s no such thing as too much money,” I laughed.
“A lot of people will tell you that banks don’t care about money – that they see “cash” every day. They say not to bother with making “all cash” offers because it doesn’t impress anyone,” I said.
“They are flat wrong. I’m here to tell you that’s just B.S.” I said.
A banker once told me that cash is like gasoline – the only time you have too much is when you’re on fire.
“So, more money is always a good thing. But remember what I said about choosing your bank carefully? What if you chose a bank whose loan committee is made up entirely of “Simons” - or a bank going through a merger or under a written warning from a regulator?”
“Remember the story about the two guys on the Freakonomics website?”
“Still, it seems like an awful lot of information. What is the purpose of it all? What are you trying to do?”
“Answer the most important question.” I said. “Can you perform?
That’s the number one thing on your banker’s mind. It strikes at the very heart of a banker’s (or any other lender’s) concern. How do I know you can (perform)? What will happen to the bank (and to me) if you can’t?”
“What can I do about that? My credit’s OK, but I don’t have a real track record for them to go on.” he said.
“A of people don’t. But a good business plan will help.”
Any time a discussion of business plans comes up there is a wide difference of opinion; it seems to strike a chord with many. But perhaps, more important than the actual plan is the knowledge and understanding you gain as you begin to develop a real working relationship with your lending sources.
Your business plan can serve as an introduction of sorts; it can also serve as a foundation upon which you can begin to build that critical relationship.
Psychology has pretty much proved (to my satisfaction anyway) that most of us need to be persuaded on an emotional, as well as a logical level. And that’s the goal of my business plan - to influence and to persuade.
I think of the business plan as the logical argument - full of reason, facts and figures - and the relationship as the emotional argument - I’m a nice guy, I pay my bills, and I do what I say. Without both arguments, I probably won’t get the loan, the deal, or the ….
Remember those questions earlier? Again, what I’m really trying to do is to reassure the bank (and banker) that they won’t be criticized for making this loan AND that they won’t get hurt. Period.
As the cycle swings from credit “tightening” to credit “easing” and back again, banks will usually change the emphasis they place on these arguments (emotional and logical), but both will still be needed.
“Ok,” he said. “But what about that “relationship” part of the equation?”
“Well, it’s important to begin that relationship in person.
Although the world may be spinning faster these days, nothing can take the place of “face time”. No level of technology will soon remove (if it ever does) the desire to connect the numbers with a name, a face, and a handshake.”
Take the time to get to know the people you’re asking to invest with you. Good deals come and go, but great relationships last.
And the secret of making those relationships last? In the words of Aretha Franklin, one simple little thing: R-E-S-P-E-C-T.”
The only problem is that you have to show them a little respect before you can begin to earn theirs.
Some of the things I do to “develop” and later to “nurture” those relationships are:
· Bring some business to the bank; not just my own. I’m in the business of building; developing, etc. - and I meet people all the time who need a good bank and a good banker. You probably do too. So, take them to the bank and introduce them.
· Learn about their business. You don’t have to be an expert, but you should learn some terminology, the current trends in the industry, and some of the local players.
· Socialize with them. I can’t tell you how many times I’ve been unable to get fifteen minutes with a new banker, but later (same day) been successful at getting four hours from them on the golf course.
· I write letters to help their kids get into college, or to get jobs. Doesn’t everyone do this? Nope. Not hardly. They most certainly do not. They could, but most don’t seem to connect the dots. What does it hurt?
· I always bring my materials (financial statements, etc.) with me. I don’t want them to EVER have to ask for another financial statement, rent roll, property tax bill, etc. Why make their job harder? Be professional and step up your game. I guarantee you they will appreciate it.
· I try to catch them doing something right. And when I do, I let everyone know about it. This may be the most crucial point - everyone likes to be recognized and feel important.
As an example, here’s a letter I wrote to the President of a local bank when his long time VP retired. The names have been changed to protect the innocent as well as the guilty.
Mr. Gary Cortez, PresidentTexas Bank
123 Main Street Way
San Antonio, Texas 00000
Dear Mr. Cortez*:*
My family has been banking at Texas Bank since 1973. We’ve seen San Antonio go through boom times and terrible times. And just like the city, our family has experienced our own emotional and financial roller coaster rides over the years.
Throughout those years, Texas Bank has been a constant; many of the people at the bank have been so helpful over the years. Arch B, Larry T, Bridget P, Sherry B, Kathy H, and David P are just a few examples of the great people at Texas Bank.
Even so, there is one person who, over the course of almost thirty years, stands above the rest - Bud Williams.
When I heard that Bud decided to leave San Antonio, I was shocked and saddened. Through the years, Bud Williams was our loan officer, confidant, and advisor. He could be compassionate, gracious and diplomatic. He could also be stern, blunt and demanding. In short, he was the perfect banker. And both Texas Bank and our family are better today because of Bud Williams.
Texas Bank made us student loans, car loans, home loans, real estate loans, business loans, signature loans, and extended lines of credit. Much of that is because of Bud Williams.
Dedication, honesty and thoughtfulness are traits you don’t find much anymore. They can only flourish where they are welcomed and encouraged. Texas Bank has done a fine job of that and Bud Williams is a shining example.
I like to think that Bud made me a better businessman; I know he made me a better person. He will be missed.
And this to Bud himself:
I have to say that your decision to move away from San Antonio leaves us with mixed feelings. On the one hand, we’re sure that you and your wife are excited about the move; that part of the country is so beautiful and green, it must seem like a paradise compared to South Texas. The move also puts you much closer to family and I know how much you’ve missed your kids these past years. No one deserves happiness more than you.
On the other hand, you will be missed here too. We’ll miss your firm handshake and easy laughter, but most of all we will miss the honesty and straight-forwardness you brought to all your dealings at Texas Bank. Those abilities are very rare, just like the man who possesses them.
We just wanted to let you know how much you’ll be missed by our family. You may be gone, but you’ll not be forgotten. Let us know where you land and how you are doing. Keep in touch - remember, you have friends here.
Eric and family
First of all, I’m not a professional letter writer (as you can easily tell by these examples) but I feel strongly that when you DO develop these “relationships” you should do everything you can to nurture them.
And that takes work. And time.
One more thing – you’ll notice that I still took the time to write to Bud when there was absolutely nothing in it for me.
Let’s take a close look at what’s really involved in those four steps:
Choose the correct bank. Banks may all look alike, but they’re not.
There are two banks about 100 miles from me that illustrate this perfectly. For over 100 years, they’ve faced each other sitting on opposite sides of the same street. They’re about the same size (capitalization), the folks who work there know each other, their kids go to the same schools, play on the same teams, and their families shop at the same stores.
But they couldn’t be more different. One bank makes loans and the other does not.
It’s up to you to make sure you choose the correct bank because it’s far too important to leave to chance.
I’ll say it again: Check out the call reports.
They’re public information and virtually all of them are on-line these days. Look for loans made. What type are they? Are there any commercial loans? How about Multi-family? Do some digging into the terms and conditions of those loans if you can.
Many smaller local banks make what seems to be a fair amount of commercial loans, but when you take a closer look, you find that’s not exactly the case. Instead, they select those loans very carefully.
I know one mid-size bank that loves to fund build-outs for locations in their geographic area - they do a little of everything – hotels, restaurants, single tenant structures. But when you really take a peek behind the curtain, you notice they only play when there is a national chain somewhere in the background.
They are perfectly willing to do the short-term construction loan, say 90 to 180 days, but they fully expect to be taken out of that loan upon the completion and acceptance of the building by the new owners.
Where that take-out funding comes from, they don’t really care. They just want their money back quickly and still be able to proclaim themselves a “local” lender.
Next, what’s the percentage of their capitalization in loans versus government paper?
Banks who like fed paper don’t usually care about making very many loans.
And of those that do, they prefer to fund only the very best – in other words, they “cherry pick”.
A bank president once told me that he normally instructed his staff to “file” loan requests from anyone he didn’t already know or who didn’t come in with a very high FICO score, a long and successful track record, and a large cash deposit.
Now, they’re not supposed to trash loan applications, but nothing says they can’t file them away in “remote storage.” His point was that he never wanted to see those loan apps come across his desk.
Informal “guidelines” like this are not at all uncommon. It’s a form of protection (banker’s think) from the possibility of unhappy surprises.
More to the point, it protects them from criticism (local, regional, and federal) and it makes their jobs easier.
Think about it – you may need a loan to acquire a piece of property, fund an acquisition, or just breathe a bit easier. The problem is that your competition will be the guy developing his fifth hotel; building out a property for a national drug chain, or for a government tenant.
There will be a long track record of successful projects and a financial statement which indicates (to the banker, anyway) that he will get the money he needs from this banker or from a competitor.
Add in the fact that often, he will often have a long standing relationship with the bank and/or banker and you begin to see what you’re up against.
OK, you know how important it is to choose your bank carefully, so let’s move on to the next step.
Developing a relationship with the bank; that means learning about the bank and the loan officers, executives, and board members. Your goal should be to know their names, their hobbies (golf, for instance), how long they’ve been in banking, etc.
One of the best ways to begin this process is just to start showing up. Introduce people to the bank – if you’re in any kind of business, you meet people all the time who are looking for a banker.
Bring the bank some business other than your own. And make sure they see you doing so.
Learn about the internal workings of the bank. Who’s the attorney that prepares their legal work? Who’s the appraiser for the bank? How many folks work in the Trust department? Who’s on the board of directors?
The goal is to find a long term relationship and to do that you have to put in the time and effort required.
By now you should realize this is a process that never stops. Begin with step 1, the selection of a bank that meets your criteria, start working to become more “informed” on that bank. Next, make sure you select another bank to become your “back up” bank.
Once you’ve done that, repeat step 2 and make sure you have a relationship with that bank as well. You never know when a merger, layoff, or even a promotion will take your loan officer and the other familiar faces off the playing field. Be prepared.
I can forgive a general for being defeated, but not for being surprised. – Napoleon.
There are a lot of ways to “help” this relationship along using language bankers love to hear such as “compensating balances”, “additional collateral”, or my favorite – “buy out agreements.”
I should mention here that rarely have to actually add any of these into the mix, just the mention of them seems to work wonders with bankers. And when I do use them, I offer them only with conditions using phrasing such as: “If I were to offer the bank additional security in the form of ____, then I would expect that collateral to be released when you’re completely satisfied as to my performance on this loan, say _______________. Is there any reason that wouldn’t work for you?”
“Buy-out” or “take-out” agreements work a bit like this: I often have a local group (or individual investor) who is well known to the bank – especially, when I am not - (Remember, that homework I mentioned at the beginning of this post?) write up a simple agreement that says they would be more than happy to purchase my interest in the project at any time within the next year (or whatever term you’re seeking) on thirty-day notice.
Pension plans are a good fit for this. Sometimes I will pay something for this (a point, maybe), but not often.
Preparing your loan proposal or project package. Again, I prefer to “stand out” from the crowd. My loan proposal will be in spiral bound format with tabs for each important section of the package. I’ve included a sample here.
Remember, I consider the cover letter to be critical. It has to do the job of introducing you, presenting a brief profile of the property, and detailing your expertise.
The cover letter also has to answer all five of those crucial questions; it should do it with a bit of grace and style… and still be no longer than a page or two at most.
~Do not skimp.~ Practice writing cover letters until you are confident in your ability to convey the relevant details of your deal. You’ll notice that many of the same elements can be re-used from project to project and over time the entire process will become second nature.
Keep in mind that in virtually every case, you will not be presenting to anyone but your local loan officer. It will be up to him or her to take it from there.
As you write, keep in mind that the letter will become a “cheat sheet” for your banker. Any questions asked by the loan committee or senior bank officers, should be answered by this document.
Think of it like this: Could your wife make the loan presentation for you? How about a friend or partner? Put a little extra effort into making your “cheat sheet” easy to use for your loan officer. Give them all the information they need and put it in a form that’s easy to use. Trust me, it will be worth it.
Here’s a look at how I put a proposal together in a package for the bank; it consisted of:
Project Package - First Tab:
~Cover Letter~ - This proposal was for a self-storage facility mortgage; and in this case, my client had already missed the opportunity to buy the thing, but since he’d already done most of the homework, I suggested he might take another swing at the “back end” of it.
This was not a bank either of us normally did business with but since they (the bank) liked the other people already in the project (there’s that homework again) and had a history of local commercial lending, I thought why not pitch it to them first.
Names are changed to protect both the innocent and those less so.
November 5, 20__
Mr. Mike Chandler, President
1234 Anywhere Street
Your City, Your State, 11111
Dear Mr. Chandler,
I am currently in the process of re-evaluating my investments and realize that I would like to increase my business holdings and commercial acquisitions over the next two years to maximize profitability and add liquidity.
To better facilitate that initiative, I would like to obtain a loan to purchase a commercial note secured by a property which I’ve had my eye on for some time; and which was recently purchased by Mr. Thomas Old Customer.
The property, AAA Self-Storage, was recently sold to Mr. OldCustomer for 1,575,000. The sale took place as follow: Mr. OldCustomer put down $750K in cash and the former owners, a local partnership, financed the balance.
In the time the partnership owned the property – for more than a decade – the gross rents ranged up to $XXXX.XX per month. Also included in the sale was additional income from outdoor advertisers and an additional adjoining parcel of land for future expansion.
As I’m sure you are aware, due to recent changes in our economy on all levels - local, regional, and national - investors are returning to the basics; putting more effort into securing economically sound properties and projects which are accompanied by attractive fundamentals.
I would like to borrow XX dollars for five years (60 months) at XX percent interest and payable in installments of xxxx.xx
I have been a licensed real estate broker since 1988 and spent the last 15 years concentrating on my own portfolio of properties. I no longer represent anyone but myself.
A complete financial statement is included in this proposal along with letters from both my accountants and my tax attorney. You will notice I have moved aggressively in the last five years to dramatically lower debt and increase equity as a matter of course on virtually every property.
I’ve also included a short history of the subject property, the partnership (and the partners), and the new property owner, Mr. Old Customer.
Despite the equity resulting from the large down payment and the substantial monthly income from the note, I realize that due to the fluctuating market conditions and unfavorable economic climate, the liquidity of this investment may be of concern.
Although I feel that my primary source of repayment would be the note income of $ xxxx.xx per month, I propose to offer you a secondary source of repayment.
I have a signed offer to purchase the note at any time within 60 days at a wholesale price of $ xxxx.xx from a private investment company. In addition to this purchase offer, I have several other short term notes (balances as indicated in the attached financial statement) that can be pledged or sold on short notice.
Should such conditions arise, the value of those notes, the income from my other properties, and the wholesale purchase offer from the investment company should prove more than adequate to repay the new loan.
I believe my long history of service and accomplishment in this city will help you to conclude that I will be reliable and responsible customer. To that end I look forward to working with you to build a mutually beneficial relationship.
I want your Money
Project Package – Second Tab: Letters of Recommendation (CPA, Attorney, etc).
Project Package – Third 3: Real Estate Lien Note, Deed of Trust, Amortizations, History (Background) and supporting documents (including letter from law firm). This is the “meat and potatoes” of your presentation. In this instance, it was a note and mortgage, but in most cases, this would be information on a property or business.
Project Package -Fourth 4: Take-out Agreements (2) - Both written to my client offering to purchase his interest in the deal using a specific formula which addressed the conditions under which the deal would change hands. This is the section that would include your secondary source of repayment.
As an example, I’ve included a letter from the Investment Company written directly to prospective borrower.
Mr. I want your Money
123 County Rd
Anywhere City, Your State, Your Zip
Dear Mr. I want your Money,
Congratulations on the recent sale of your commercial property, AAA Self-Storage.
As you are aware, our company specializes in the acquisition of existing notes and mortgages throughout the Southwest.
This year, we’ve decided to place a special emphasis on the commercial sector. With this in mind, I would like to make the following offer of $ ________ for the real estate lien note secured by AAA under the following terms and conditions:
It is our understanding that the property was sold to Mr. Thomas OldCustomer of San Antonio for the price of $1,575,000.00 and closed on October 1 of this year. Mr. OldCustomer paid the sum of $750,000.00 as a down payment and the balance of $825,000.00 was financed by your investment partnership. This financing is evidenced by a real estate lien note, a warranty deed with vendor’s lien, and a deed of trust.
We will purchase the note and trust provided that:
- We receive an assignment of the note and mortgage duly executed by the partnership of _______________ (former owners of the property).
- The unpaid principal amount of the loan is not less than $ 815,000, repayable in monthly installments of ______ each, beginning on the first day of the month after the transfer and assignment of the note and mortgage to us, which installments will be applied first to interest on the unpaid principal at the rate of ___ percent per year and the balance in reduction of the principal debt. The final payment of the loan will be made ___ months after the due date of the first payment.
- The terms and conditions of the loan agreement shall have been complied with and no condition or event that would constitute a default as defined in the mortgage shall exist at the time of the transfer to us.
- We shall have received a title policy insuring our title as assignee of the mortgage in the sum of $825,000, with only such exceptions to title as are set forth in Exhibit B attached hereto.
- We shall have received a plat of survey, showing that the exterior walls of the buildings are within the property lines, and satisfactory proof of compliance with all laws, regulations, and zoning requirements applicable to the construction of the buildings.
- We shall have been furnished with first insurance policies in an amount not less than $825,000, with mortgagee clause in our favor attached. The fire insurance policies shall be from duly incorporated companies authorized to do business in the State of Texas and approved by us.
- We shall have received certified copies of the Partnership Agreement and amendments of ____________________________, a list of its partners, certified copies of the proceedings of the partnership authorizing the execution of the note and mortgage, the name of the managing partner, and the opinion of counsel for the partnership that the note is a valid and enforceable obligation of Mr. OldCustomer to the partnership according to its terms and that the mortgage is a valid and enforceable first lien on the real estate, subject only to the exceptions noted on the title policy.
Very Truly Yours,
President, XYZ Capital Investments, LLC
Project Package – Fifth Tab: Commercial Appraisal, Maps, Zoning Information (for additional land included with original sale)
Most of the time, I try to choose the appraiser, if possible. And usually, a commercial appraisal, this is more detailed (and more costly) than a typical residential one.
- Appraisal of Property
- Comparable Property Sales and Analysis
- Pictures, drawing, and floor plan of Physical Layout
- Location Map (include zoning, if applicable)
- Surrounding Area Land Sales Map
- Surrounding Area Improved Property Sales Map
- Surrounding Area Comparable Rentals Map
Project Package – Sixth 6: Detailed Income Statements and History for the subject Income Property (more detailed than in the Commercial Appraisal above).
That about does it for the presentation package, but I’d like to make one or two more points.
First, I’m often asked why I don’t put the financial statements and accounts into the presentation package (in the binder). The primary reason for not doing that is that these things live on for years.
Long after your project is history, this package may still be around this bank or floating around in the banking world somewhere. Make it count.
Remember my experience?
Financials are “living” documents which simply means they change all the time. You may be able to come up with a good reason to include these documents, but I can’t.
Yes, I provide them to the bank (and the banker), but they are under separate cover to protect the bank and to comply with privacy regulations.
The other point is about those “financial projections” among the data you’ve included. In thirty odd years of reviewing business plans and forecasts, I‘ve never seen one that predicted failure.
On the contrary, most paint very rosy pictures often accompanied by graphs of ever increasing sales, values, profits – you get the idea.
I’m not saying you should downplay your project. Not at all. What I am saying is don’t expect your banker to drink the Kool-Aid just because you whipped up a fresh batch on your home computer. Gravity applies to us all.
The last step in the model consists of only one thing: Relentlessly work to maintain the relationship you’ve spent so much effort into building in the first place.
How do you do that?
Do what you say you’ll do.
Don’t ever let your bank officer have to ask for any information of any kind. For business loans, banks usually require financial statements be delivered to them on a regular basis – say, every six months, or sometimes, annually.
Be early with these. Bring them with you when you visit.
Keep your bank and your banker “in the loop” at all times. Share building plans, zoning information, development changes… just about everything with them.
Return all calls. ASAP. Nothing makes bankers more nervous than to get the “run around” from a customer. They can’t think of any good reason you would duck their calls and as a matter of fact, neither can I. So don’t do it.
As you begin this budding relationship, try to discover some of the inner workings of the bank. Who may be on the fast track to promotion and who’s not. Who the bank’s favorite appraiser is, and which firm(s) do they prefer not to use (might be smart to find out why as well).
I like to find out which law firm does most of the legal work for the bank. In the future, I try to use that attorney for some of my projects. You never know when that might pay off.
Down the road, I may need to pledge, collateralize, or obtain releases for projects and I’d like the bank to accept the paperwork pretty much “as is”. When they see the paperwork has been prepared by the same attorney who prepares the bank’s documents, it does tend to make them a bit more confident.
Find out what the bank’s pet projects are and learn more about them. Banks – especially local banks – tend to believe they take the long term view of their communities. That means they follow zoning boards, development plans, city wide ordinances closely.
And while we’re on the subject of the long view – what items are of concern to your banker, to his industry, or even to those of his customers?
Technology today makes it easy to have relevant news items, notices, and other information delivered to your laptop at the click of a mouse. Who knows? You might learn something.
Early the next morning, my friend and I were sipping coffee on the front porch of the old rock ranch house that served as the kitchen for lodge guests. A cool breeze drifted up from the river valley as the sun tried to chase away the fog that hung along the river bank and for the moment, made it impossible for me to take off from the landing strip only a mile away.
Setting his coffee cup down, my friend spoke up. “So there’s five questions and four steps, right?” He said.
“You got it.”
“Let me see if I can remember what goes where.” He said.
“OK. Give it a shot.” I said.
“The five questions the banker really needs to know are:
- How much money do I need?
- When do I need it?
- What am I going to use it for?
- How am I going to repay the loan?
- What’s my secondary source of repayment, my plan “B” going to be?
“How’s that?” He said.
“Letter perfect” I said. “What’s next?”
“Well, there are four steps to getting a bank to listen, I mean, to developing a banking relationship.”
“Step 1,” He began, “is to choose the bank and not just pick one at random. Not all banks are alike and I want to find one that wants - and values – my business.
“Step 2 is learning about the bank I selected. You know, names, dates, hobbies, interests – that sort of stuff. Try to get to know them so that they will feel comfortable dealing with me.
“Step 3 is to bring the proper paperwork with me when I ask for a loan. I need to make sure I write up a “cheat sheet” for my loan officer that answers all of those five questions on a page or two. Don’t cut corners on the packaging. Do it all up neat and tidy.
“Step 4, the last step, is to maintain that relationship by continuing to keep them in the loop, bring them information before they ask for it, and generally being straight with them.
“That about it?” He smiled.
“Sounds like you’ve got it down.”
Glancing at the fog still covering the runway, he smiled again, “Doesn’t look like you’re going anywhere soon.”
“Well, at least I’m out of cell range. I kind of like the quiet.” I said.
“Then you won’t mind helping me with something else, would you?”
“No, I don’t guess so. What is it?”
“I’ve been thinking I could use your help with this cover letter to the bank.”
“You’ve got to be kidding.” I said.
“Well, if you stay another day you can help me with the letter. We can get started right after lunch, if that’s OK.” He said.
“What’s keeping us from doing it right now?” I said.
“I thought we’d hop in the Jeep, run up the hill to see the sun come up and then catch a little fish for our dinner. All we have to do is catch ‘em, the cook will clean and cook them for us.”
“You drive a hard bargain. I think I could get used to this.”