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Commercial Lending

Seven Basic Truths in Commercial Lending, Part Two

Patrick True
Sep 21, 2018


Part 2: Communication, Intuition, and Passion

Truth#4. There’s No Such Thing as a “Book and Don’t Look” Credit Facility 

Most experienced lenders would say that they never made a bad loan. While we can debate the accuracy of that statement, it is true that loans fail over time due to changing business or economic circumstances. Once a loan is on your books, it is your responsibility to make sure it is paid in full. 

Did you miss Part One? Check it out here.

This requires that you continue to monitor changing business conditions over time. You cannot afford to walk away from this responsibility. That causes both customer service and credit management to fail. First you lose touch with your client and their vision for their company. Then you lose touch with the financial condition of their business. This increases the chances that you could be surprised by a future interruption in their business. It also causes you to lose new business, since you miss out on follow-up loan requests. During my career as a lender, the number one reason why I could steal business away from a competitor was that the business owner felt they had been ignored by their previous lender. Through inaction, that lender was no longer seen as a trusted advisor in the relationship.

For years, I have lobbied to add a sixth C to the Five C’s of credit. That sixth C would be communication. Debtor-creditor relationships cannot survive without communication. In fact, no relationship can. Both internal and external factors impact every business over time. These impacts can be either beneficial or detrimental to the operation. Only through active and ongoing communication can a lender and a borrower identify and address those impacts.

Truth #5. You Never Really Know Your Customer Until You’ve Seen Them with Their Backs Against the Wall

A very small percentage of fraud cases started with a business owner’s criminal intent to steal from the financial institution. In some cases, the owner or one of the key employees found themselves in a high stress situation where they felt that the business was in jeopardy. In others, they may have been attempting to cover a loss from some other segment of their life, such as a drug or alcohol addiction, a gambling problem, or even an event such as a medical emergency. While most of us were trained that character was one of the Five C’s of credit, few of us were armed with knowledge of what a lack of character might look like, or how it might play out in a workout scenario. For most of us, that happens with time, as we experience situations and manage workouts.

Over time, we develop trust in our clients. Otherwise we would never approve new loans. The key is never to become complacent. Don’t let that trust blind you to issues you see brewing within a credit relationship. Don’t look the other way simply because the borrower has been banking with you for twenty years, or you have gone to church with them for ten. Let your portfolio management systems guide you and allow your experience to tell you when signs are pointing to a potential problem.

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Truth #6. Listen to Your Inner Voice When it Tells You Something is Not Quite Right

As stated earlier, lending is as much an art as a science. We can deploy all the tools we want to measure collateral values and business metrics over time, but there is still something to be said for intuition. Sometimes you simply have a sense that an issue is surfacing. You may find it in your financial analysis or possibly a comment made by an employee of your borrower. These signs can take many forms. The point is not to ignore them. When thinking of intuition, I am reminded by this quote from Gavin de Becker, designer of threat assessment systems and author of The Gift of Fear.

“Intuition is always right in at least two important ways;
It is always in response to something.
It always has your best interest at heart.”

Don’t ignore your inner voice. It is very likely that the more experience you accumulate during your career, the better it will serve you.

Truth #7. Follow Your Passion

The best commercial lenders tend to be those individuals who are passionate about what they do. They thrive on getting to know new businesses. They love to meet new entrepreneurs. They find it exciting to see all the business ideas people come up with. If you truly love what you do, in any profession, your passion will drive your desire to be the best you can be. Both your employer and your customers will benefit from that drive.

Commercial lending is a challenging field. In many ways, it requires the merging of two personalities into one. On one hand, it requires someone who enjoys developing new business and meeting sales goals. On the other, it requires someone who understands businesses dynamics and knows their way around a financial statement. Sometimes these roles are split between credit analysts and commercial calling officers using a hunter, skinner approach to loan growth. In smaller organizations, though, that may not be practical.

Your clients deserve a lender who is passionate about the business of making loans and managing lending relationships. This goes for pretty much any profession in life. If you enjoy what you do, it feels a lot less like work.

There you have it, seven observations from a career in commercial lending. Maybe you can relate to some of these. Maybe you are just beginning your career and will re-discover these truths over time. This is an exciting time to be in the business of commercial lending. Technology is creating new opportunities every year. A new generation of entrepreneurs is rising. Like many careers, sometimes it can feel like a rollercoaster. So be sure to keep your hands and feet in the car at all times, but most of all, enjoy the ride. 

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