Borrowing Money: What You Should Tell Your Banker

Depending on others to fund business growth requires you to divulge information you probably would rather keep confidential. But disclosing too much information can harm your prospects of gaining loan approval. This article addresses the types of information financial decision-makers really need when reviewing loan documents, material seen as extraneous and content that can actually harm your loan request. In the money business, more is not always better.

Jim Syth was so convinced the 20-lot subdivision would work, he couldnÆt understand how a bank could have turned him down for a loan. Undeterred, Syth, president of Bridger Builders in Bozeman, Mont., convinced the landowner to prepare a contract and found private equity partners to fund infrastructure construction. The project was built, the scope of SythÆs business changed dramatically, and Bridger Builders developed a reputation for construction of high-end homes in the Bozeman area.

ôI value the bankÆs opinion of a project,ö Syth says now. ôI want to tell the bank everything. I want them to show me the pitfalls. I donÆt want to get hurt, either.ö

Syth had been a concrete subcontractor and a builder of packaged cedar homes, and the banks saw his subdivision project as too speculative. ôThe ratios were not there,ö Syth says, so a bank loan was not forthcoming.

Today, years later, Bridger Builders has an an-nual volume of $5 million to $6 million. Syth says he can shop among banks when he needs a loan, with three or four vying for his business. But what changed?

Rich Copeland, vice president and senior construction lending officer for 1st Constitution Bank in Cranbury, N.J., says track record is an important component when a loan officer reviews a loan application. He refers to ôglobal position,ö which encompasses a builderÆs total exposure. Specifically, he looks at such issues as a builderÆs liquidity and cash flow, whether current projects are sold, and if closings (and cash infusions) are on the horizon.

Copeland also likes to look at jobs in progress, as well as completed projects, to get a sense of the quality of the builderÆs work. But he really gets excited when builders do their homework before asking for money.

For a new prospect, Copeland gives credit to those who walk in with market comparisons to demonstrate that a project will work. It shows that the builder has taken the time to meet with Realtors or appraisers, and has realistic expectations.

Additionally, Copeland looks for a marketing plan, detailing how the project will be promoted and sold. This is not to be confused with a business plan. While loan officers want you to be successful so they can finance additional projects, their immediate concern is limiting the risk on the current project. And loan officers are reluctant to roll the dice with anyone new, so strong personal financial statements coupled with such characteristics as longevity by employees demonstrate staying power.

Builder Scott Christopher of Scott Christopher Inc. in Grand Rapids, Mich., stresses the importance of the ôwowö factor in a presentation to a bank. His acquisitive company conducts pre-meetings with prospective lenders just to gauge interest for a loan application.

After those meetings, ChristopherÆs company prepares a notebook that includes information on the existing company (structure, planned growth, future expansion, facility needs), information on the intended acquisition (demographic data, products and services), organizational structure of the business to be acquired and financial requirements (cash flow projections, net income, current profit-and-loss statements), followed by the loan request (including loan terms and payment plan). When necessary, biographies of Christopher and key employees also are included in the presentation binder.

ôYou have to make it easy for people to do business with you,ö Christopher says. And his financial projections and pro formas tend to be conservative so his company can exceed bank expectations. That type of performance sets up the next loan request.

In terms of which size bank to approach for money, think small. Large banks have layers of hierarchy, and getting a quick response might be impossible. A small builder probably will find dealing with a community bank more satisfying and productive because experienced loan officers know what they need when they present the application to the loan committee, and also know exactly what the bank is able and willing to do.

Jack Atkins, owner of Premier Homes in Crossville, Tenn., says his four-branch community bank has given him all he needs to run his diversified business. Atkins got his first construction loan in 1996 and has cultivated his relationship with Progressive Savings Bank to help him construct a subdivision, build warehouse space and move into systems building. ôIÆm in a rural area, and personal relationships still make a difference,ö says Atkins.

But builders should not necessarily limit themselves to just one bank. In this day of consolidation and cost cutting, banks and loan officers come and go. Having two banks and working with two loan officers should offer some protection for a builder if one bank is gobbled up by a larger bank or if a loan officer switches jobs. A construction company with ongoing projects and continuous capital needs can alternate projects between banks or use the strengths of each bank. If one bank, for example, has better programs for residential development while another specializes in commercial construction, deciding which loan officer to work with depending on the project being financed is relatively easy.

In the end, remember that banks make money by loaning money, not by rejecting applications. But they lose money when a loan goes bad, and a portfolio of bad loans is not good for a loan officerÆs career. Build a track record, make sure your credit is sound and prepare realistic financial projections. Bankers really want to say yes. Make it hard for them to say no.

Stan Ehrlich, a past president of his 550-member local builders association, is a personal financial adviser in Clinton, N.J. To comment on this story or suggest an idea for a future article, e-mail him at sfehrlich@rcn.com.