Borrowing Principles in the New Credit Environment

Borrowing Principles in the New Credit Environment

As we tell our clients, banks are now asking for three times as many documents as they did ‘pre-meltdown,’ and they’re reading everything they ask for. For example, home mortgage information is no longer just a line item on a personal financial statement. In the new credit environment many banks insist on reviewing the potential borrower’s mortgage agreement to determine if there is a looming vulnerability to future rate increases. This, and many additional details of the owner’s personal financial life have become part of the due diligence process.

It is no longer two or three years of tax returns, it’s three; and don’t forget the tax returns for any related business entities. Now, every extra layer of corporate structure multiplies the time and attention necessary to present these details. We advise thinking twice before forming a corporation for every new business idea or venture. Lenders want complete information on all owners, and all related or subsidiary companies, even if it’s just an entity for equipment or property ownership. They are leaving no stone unturned, no question unasked. So, we often counsel our clients to close unnecessary entities and transfer assets into the parent company. Get used to this level of due diligence. It’s the new credit environment.

The primary success factor for borrowing these days is tolerance and patience for details – for the nitty-gritty of financial presentations. This due diligence will challenge your filing system, as documentation is requested for everything from property lease agreements to IRA statements.

Many banks are lending, but it is critical to ask for three references of recent business loans that have closed, and for you to contact those references. They can provide valuable insight into how the bank is operating and other keys to success. The goal is to determine if the representative with whom you are interacting is merely expressing this week’s marching orders from management, or if the bank is lending with consistency.

During our fifteen years of financial advisory work, we have found that there is always money available for good projects, even now. If you believe in your company and your project, it is more important than ever to present the whole opportunity with clarity, and full documentation. Strategy matters more than ever, but determination matters above all.