It’s time to add a “6th C” of credit

Author: Pat True, rtrue@profitstars.com

It often seems that the more devices we have to facilitate communication, the less we engage in meaningful conversation.  The quality of communication seems to suffer as the quantity of e-mails, voice mails, texts and IM’s has soared.  While these tools offer significant efficiencies, we need to make sure they do not impact the credit quality of our business relationships.

Most small business lenders were trained to recognize the “5 C’s” of credit.  Given the fast pace of the information age, it may be time to add a sixth.  While the first five C’s (character, capacity, capital, collateral, and conditions) are still important to credit analysis, they should be accompanied by one more to ensure long term success.  The sixth C is the quality of communication that takes place between the business owner and the underwriting credit officer.  During initial phases of credit analysis, the sixth C is critical in defining the:

• The strategic vision of the business
• The growth plan
• Succession planning
• The owner’s opinion of what financial services would help move the business forward
• The site tour to see how the business functions day-to-day

Much has been written about the benefits of credit scoring for business loans, but this is one area where credit scoring is insufficient.  It is hard to communicate vision and growth objectives through a credit score.  Most lenders have had the experience of being on the fence over a deal until they were able to go on a site visit, meet the owner and key employees, and see how the business was run.

Communication is important for several reasons.  First, it serves as evidence that the business owner does indeed have a vision and plan for the organization.  Second, it allows the business owner to think through the elements of success in moving from point A to point B on that plan.  Third, it allows the credit officer to see that vision, and to develop a strategy to help the business owners meet their plans.  Most importantly, it defines the nature of the relationship during the coming year.

This communication does not stop once the deal is approved.  For existing relationships, communication becomes your primary business retention tool.  Lenders who consistently make retention site visits will likely find that:

1. Clients utilize a wider variety of your financial services
2. Your organization experiences longer retention rates
3. Owners tell others about their positive experiences, resulting in referrals
4. The financial institution can often expand the business relationship to offer financial services to employees of the business

Face to face communication is something that some larger organizations have lost over the years.  It should be a key competitive advantage for smaller financial institutions.  Are your lenders making regular onsite visits to your small business customers? Are they engaging them in conversation about the business?  Are they asking for referrals?  If not, you may not be maximizing a significant advantage.