As a lifelong banker, my passion is helping people succeed financially. But I can’t tell you how many times I’ve sat across the table from brilliant entrepreneurs or business people who struggle with misconceptions about loans. These misconceptions can be costly — not just financially, but also in terms of wasted time and energy.
Let’s start with a common culprit: credit.
When I was 11 years old, my daddy sat me down for a serious talk. He said, “Carole, there are three things that will impact you all your life: what profession you choose, who you marry and your credit score.”
While I can’t recall that story today without some humor, as a banker I can’t say he was exaggerating! My daddy helped me understand from an early age that the importance of a good credit score can’t be underestimated.
In your lender’s world, credit involves both your credit score and your debt-to-income ratio. To ace the credit test, you’ll need to think bigger than simply paying your bills on time. Be prepared to show your banker that you have sufficient income to cover all your current debt obligations, and then some.
Another misconception is a borrower’s tendency to overvalue collateral when discussing repayment ability. Keep in mind that only cash makes loan payments. If banks have to liquidate assets, their value is always discounted — that’s why cash trumps collateral in your lender’s world.
Lastly, never underestimate the importance of character. Whenever lenders are approached for a loan, they ask themselves, “Would I lend my personal money to this customer?”
While assessing character can be subjective, your banker can either learn about you from rumor and reputation or from you personally. Make it the latter! Interact directly and, if possible, in person with your lender. This will give you the best odds to make a strong impression and earn trust.
To recap, here are four “litmus tests” to help evaluate your loan-worthiness. And don’t worry if you don’t “pass” all these tests today. With a little time and focus, you’ll get there.
Litmus Tests for Loan-Worthiness:
1. Credit, a two-sided coin
What are you doing to ensure a strong credit score? Do you have income to cover your debt obligations, plus some left over?
2. Cash flow vs. collateral: know the difference
How can you maximize cash flow? If your collateral assets were liquidated, how severely would their value be discounted?
3. Rumor has it…
How’s your reputation? Your lender will likely check up on you, so think ahead about what you want them to hear and let those goals mark your interactions with others.
4. Consider the conditions
This is especially important for commercial loans. Show your lender you’ve thought through the economic climate. Bankers know you can’t control the economy, but they want to know you have a plan for hard times.
Carole Smith is the senior vice president and commercial lender for Simmons Bank, where she spearheads business development for corporate and personal accounts while managing an $80 million loan portfolio.