Scarcity of strong loan applicants shifts bargaining power to qualified borrowers

Jeffrey MacMillan/JEFFREY MACMILLAN - WIth the second fastest growing bank in the US, John Maxwell, Chairman & CEO (L), and Bill Ridenour, President and CAO, at the John Marshall Bank office in Reston, Virginia.

Now may be the best time in years for small-business owners with good credit to shop for a loan.

Assuming you qualify.

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A litany of factors play into whether a small business is considered a “highly qualified” loan candidate, and each bank weighs those factors differently. But if you meet a lender’s test, you may hold the upper hand at the negotiating table given the current scarcity of such borrowers.

“Banks now are looking for quality borrowers and they are willing to sacrifice yields to obtain a quality relationship with a good business,” Bill Ridenour, president of John Marshall Bank in Reston, said. “So while it pains me to say this, if you have done your homework and you are one of those customers that is currently well qualified to borrow, you should drive a good bargain when negotiating your terms.”

John R. Maxwell, chairman and chief executive of John Marshall Bank, said his bank has put a particular emphasis of late on whether business owners have a secondary source of repayment (for instance, investment properties or marketable securities) and whether they are willing to stand behind the credit by making themselves personally liable.

Still, bank officials said the most important factor, and the one small-business owners should lead with when requesting for a loan, is their track record.

“People come in with these fancy business plans, and I don’t want to say we totally disregard them or throw them in the trash, but I will say I have never had anybody sit on the other side of the desk and tell me his project wasn’t a sure thing,” said Jimmy Didden, president of National Capital Bank in Washington. “We don’t bet on potential, because that involves projections that may or may not be valid. We are more interested in looking back at the history of the business.”

Didden also said his bank expects the principals behind the business to bear as much if not more risk than the lenders, noting that National Capital Bank won’t generally underwrite loans if owners are not willing to put their own assets up against the credit.

But for those seeking capital who do have a proven track record, a backup plan for repayment and the moxie to put personal finances on the line, now is perhaps as good a time as ever to shop for a small-business loan.

“If you have all of those elements in today’s market, you are going to have banks that are really interested in providing you financing,” Ridenour said. “Meet with several banks, compare the interest rates they are going to charge, the stability of the bank, the experience of their management team, and find the one that best suits your needs and is willing to make a commitment to your business.”

Ridenour urges small-business owners not to directly play one potential lender against another by sharing each bank’s offer with the others. That strategy, he said, leaves “a bad taste” in bankers’ mouths and suggests that the borrower places little emphasis on loyalty and strong business relationships.

Instead, prospective borrowers should collect proposals from a number of financial institutions and engage in further discussions with the ones that make the most compelling offers. Should several banks make similar pitches, he said, then there’s nothing wrong with giving them each another opportunity to sweeten their proposal.

Ridenour also suggested borrowers play close attention to each bank’s legal lending limits in an effort to ensure their business is neither the smallest nor the largest in their lender’s portfolio.

“Make sure you’re banking with a bank where you are big enough to be meaningful and important, but not so big that if you grow a little bit you will outgrow the bank,” he said. “If a bank has a lending limit of $5 million and you need to borrow $4 million, that may not be a good fit, because with a little bit of growth, you could be back searching for a new bank a year from now.”

Several bankers agreed that the sluggish state of the economy and lack of political clarity are likely to leave qualified borrowers with substantial bargaining power for several months to come.

“There is still a lot of uncertainty over taxes, the deficit, and the election,” Ridenour said. “Until those start stabilizing, banks are going to continue taking a much lower yield in exchange for minimal credit risks.”

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