Business Q&A -- Roger Busse
Roger Busse is senior vice president of credit administration for US Bank
Q: Why is it difficult for bankers to evaluate potential borrowers?
The most important thing that bankers glean from their first job is working with two things, format or process of diligence analysis that teaches us a framework of risk analysis that isn't commonly taught in business schools. That takes a mentorship, practice and time. The other thing is when they come into a specific commercial lending function, you typically don't have enough industry background to understand specifically how a customer is affected without working directly with him to understand their products or services and what things touch their business.
So, you can get a lot of theoretical and case study work, which is extremely helpful, but the practical application of that just takes time and experience.
Q: When bankers are making their financial analyses, what are the questions they ask themselves?
Bankers are very interested in the financial arrangements with clients that are beneficial to them and the bank's objectives as well. To do that, the whys they ask are basically around what the product or service is and what things can affect it, and sales. They?ll take the products and services and put them against the economic competitive environments. They?ll look at market share, where the business is in its lifecycle.
By following this due diligence process, they can uncover questions that lead them to ask what things are affecting the business. Then when they get to the numbers, they can begin to assess the whys behind the numbers. That helps them explain whether the trend is a one-time event, whether it's going to be ultimately detrimental to the business. Or if it's something management is effectively managing, which is a very strong credential. Based on that you can go to the outlook for the next year and you know most of the whys behind the numbers and what things are truly affecting the sales in the future and the performance of the company. By sensitizing the future and working with the borrower you can see what the effects are in cash flow and debt service repayment. Then you can make your decision by recommendation.
Really it's a risk/due diligence process that leads to a conclusion. Do we have the right structure? Do we understand the risk? Have we got the right collateral? Do we have high probability of repayment? We are not trying to find reasons to not do a deal. We are trying to find reasons to understand what can make the deal happen.
Q: What aspect of under-capitalization dooms small businesses early in their existence?
A lot of small business don't have enough cushion, enough capital up front. They should have a sufficient enough up front to at least cover six months of operation, maybe longer. They come in under-capitalized and start loading up on debt or they start leaning on the trade creditors, and that creates immediate financial stress. Before you know it, they're in trouble. Then they start pulling in personal financial resources. A lot of small business owners start by taking equity loans or other types of loans to try to build capital. But the best technique they could use is to create a 12-month cash budget to understand exactly what their peak needs are as far as borrowing and whether they have the resources to cover that.
A thing bankers have to remember is that when borrowing takes place, they have to be repaid. A line of credit isn't the solution. It's what does the cash flow budget show and when will the cash begin to be generated?
Q: What is the lender's primary fear when meeting a new customer or a new small business client?
One of the things I was concerned about when I was lending was making sure my questions were received and understood to be probing questions to help me understand the businesses I began to profile. You want to make sure your questions are engaging and perceived as helpful. That you?re open and you?re consistent and explaining the process why the questions are being asked so that the answers you give are open and honest. Bankers are perceived sometimes as always looking for things that might be issues. Instead, as risk managers, they're responsible for developing a profile of what the risk is. They have to do due diligence.
Business owners are sometimes concerned they may be revealing more than they need to, maybe uncovering issues that might hurt their chances. But that is a misperception in that in a start-up the best thing to do is find someone with a good experience with a banker and then be open and honest. You?re more apt to have a conversation that is more open and less rigid.
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