Long ago, a business owner with a completed application, reasonably profitable financials, an optimistic financial forecast (that perhaps every banker knew would likely require intervention by the authors higher power to achieve), and more importantly, a long-standing relationship, was about all any community banker needed to have loan closing documents ready by weeks’ end at noon.
Those were the days. When it really was about all that was needed to access more than enough liquidity and working capital for even the newest and most unestablished of companies.
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Times Changed. Enter: Dodd-Frank, Sarbanes-Oxley. Exit: Easy Money
As most of us know, around 2010 after the financial crisis, where certain select multi-billion dollar publically traded companies cooked the books, corporate officers pilfered the very coffers they were charged with protecting, lavishing in things like $100,000 desks, which was subsequently auctioned off after the company’s collapse.
In the 2000s, several very large public companies, through fraud, deceit and willful “book cooking”, collapsed, leaving investors penniless, many losing their life savings.
This combined with the collapse of several large banking institutions and the national mortgage crisis caused for several sweeping legislative acts to come into play: Sarbanes-Oxley which creates corporate auditing and accountability, and Dodd-Frank, which put an entirely new legislative blanket of oversight over financial institutions.
Because of the Wrongs of a Few, the Many Must Pay
With the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which forever changed the banking landscape, the entire relational environment in which bankers “knew their customers” and often made lending decisions heavily weighted upon their personal comfort with the applicant, for the most part ceased to exist.
After passage of Dodd-Frank, I have spoken to numerous bankers.
The constant message has been they often decry the legislation as overtaxing, overbearing and an incredible impediment to doing their job on a daily basis.
Many say that 50 percent of their day is spent just satisfying regulatory requirements, while the other 50 percent is often spent trying to find qualified businesses to lend money to.
Because the regulations have so greatly tightened and defined who, and under what terms, they can extend business loans to, the easy and simple process once available to small business owners to attain bank financing, is considered and believed to be a thing perhaps permanently in the past.
One such bank that I spoke to recently here in Atlanta said that they were so flush with cash that the regulators were threatening to fine them if they did not lend more of it.
Their response was they simply cannot find enough qualified businesses to lend to, as the bar has been set so high due to the Dodd Frank act.
In order to remain in compliance of the strict Dodd-Frank rules, their approval rating for applicants was somewhere around 6 percent. Meaning 94 percent were declined.
It Pays to Listen
In my 10+ years (and growing) as a business lender, in the factoring and asset based lending world, I’ve become accustomed to listening to business owner’s tell me their “story”.
Sometimes they talk about their business. Other times they venture into an entire range of topics: from their grandchildren, their childhood, how they struggled to make it in the early days, to any of the many very important lessons they have learned in life and the many lessons they have learned in business along the way.
I’ve had the pleasure of 10 years of listening and learning to the extent that it probably qualifies for a couple of college degrees.
Through this I’ve learned one thing if I’ve learned anything: never put yourself in a position where listening has no value.
I say this because I have watched bankers go from their entire career of patiently listening, taking in every word a business customer had to say, often engaging in the conversation with follow-up questions.
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I’ve watched them do this all of my younger life, as if it had a great impact on their decision to say yes or no to their loan application. In fact, before Dodd-Frank, it very much did.
It Doesn’t Matter What the Story Is, My Hands Are Tied
After Dodd Frank this became the moniker of many bankers.
Those same people, trained for years to listen to their customer, have now become almost order takers in a drive-through line. If all the stars align, and as they say in banking, “if you really didn’t need the money anyway”, an approval might be given.
But don’t blame your banker. Their hands are simply tied.
Otherwise the lending criteria now prescribed by the government, under which banks may grant new loans, and also under which they may maintain existing lines, has become so strict that essentially, you can probably borrow it, if you don’t really need it.
Meaning, if you have the cash or assets to secure the loan fully, you can probably have it, but that’s not 100 percent guaranteed either.
Why Listening Matters
In all events, listening to their story has proven over the years to be absolutely paramount when you are a non-bank, nontraditional business lender.
Those “stories”, those sometimes seemingly long stories, serve numerous vital roles far beyond their entertainment value.
As a lender, they provide us an invaluable glimpse into the lives, personalities, level of tenacity, willingness to stay the course and most important of all: The Character, of the storyteller.
Why else as a non-bank lender, must we listen? Because no matter the best laid business plan, regardless that the financial model has more formulas than Google, or every bank in the State has said, no, non-traditional lenders are looking for reasons to say, yes.
The story, more often than not is what motivates us.
Important Characteristics to Look for in a Non-Bank Lender
I recently had the pleasure of interviewing one of Asset Based Lending’s most respected and successful companies.
I spent several hours with Sean Lelchuk of Atlanta, a Senior Vice President with Far West Capital.
I asked Sean what is the number one thing that Far West looks at when determining if a business is a good fit with their platform.
He did not hesitate a moment when he responded “Character”.
“We very much look at the character and quality of that character of a perspective borrower as well as their overall Story."
Curious as to why character ranked the highest, Sean’s reply was, “We can pretty much work through any obstacle, overcome a business that has had poor performance, after all because most banks cannot extend lines of credit to most companies with poor financial performance, that is exactly in fact why we exist.
So that leaves character, because our industry is such a target for fraud, character is imperative when considering the risks that asset based lenders and factors take on.
We are effectively trusting the client to submit valid and bona fide invoices for which we can help them monetize long before they would ordinarily otherwise get paid."
More to come…
Stay with us as we continue to dig deeper with Sean in part two of this interview with an asset based lender.