When it comes to a business owner, securing funds to keep the business running or growing is likely top of mind all year round. But in light of the recent Brexit vote and market uncertainties that lie ahead, now is a good time to remind borrowers to be buttoned up when talking to a lender.
With one in four (25 percent) Indiana business owners looking to substantially grow their business by 10 percent or more over the two years, according to PNC Bank’s recent Indiana Business Owners Survey, here are several common speed bumps during the credit approval process that can be avoided with some advance planning:
Adverse Information – Not a good idea when it comes to credit. Lenders rarely like surprises. If there is adverse information in your company’s closet, be upfront and transparent. Sometimes undesirable tidbits are held back and trickled out on a need-to-know basis, such as shareholder lawsuits, past criminal activity, asset impairment, etc. Your lender needs and wants to know! And your skeletons will be discovered during due diligence. Leaking bits and pieces here and there can impact the credibility of you and your management team. Remember the best relationships are built on mutual trust.
Old Mortgages – Mortgage liens never expire. Before a new loan is closed, the lender will require a title search on any real estate assets. And, surprise! A mortgage lien is unearthed, a relic from a bank of the past, whose name is now history due to a merger or an acquisition. Tracking down the right department at the right lender to satisfy an old lien may take time. Avoid a last minute setback and check this one off early.
Mystery Signers – It happens more often than you’d think. A borrower that is not a person needs company authority to borrow money and to sign related documents. Be sure to update the board resolution granting authorization. An outdated resolution can sidetrack the loan process until a new resolution reflecting the current signers is in place.
Reality Check – Let’s talk assets and liabilities. To facilitate a smoother loan closing, be as accurate as possible in the representation of both. Granted, circumstances can change on both sides of the balance sheet over the course of the due diligence. First things first: What does your company look like on paper? Audited financials are the gold standard. But, for certain types of loans, the lender will be sending out a field auditor to kick the tires, so to speak, and look under the hood to confirm the value of collateral. In addition, due diligence includes review of all assets and liabilities – such as inventory, accounts receivables, accounts payable and outstanding loans. Keep in mind that should circumstances change, so too may the final terms and conditions of your loan.
Flood Insurance – It’s all about location, location, location when real estate – property and buildings – is used to secure a new loan or was used previously as collateral on an existing loan. The lender will need detailed information on the buildings to determine if flood insurance laws apply and if flood insurance is in place. It’s not a road block, but a flashing yellow caution light.
All Creditors Are Not Created Equally – Over time, you may have accumulated a variety of creditors, or even be adding creditors to the new loan. They all have skin in the game, ranging from equity investors to senior secured lenders and others in between. Do you know the roles and expectations of each and the rules of engagement? It’s an important question, because the borrower may be called on to play referee to get all players aligned. Knowing that your new financing will not close until all lenders are in agreement is a good motivator for you. Keep all parties talking to get them across your finish line.
Don’t let the credit approval process get detoured or hung up on one of these speed bumps. And keep in mind that communication is a two-way street. Honesty and transparency between the lender and the borrower are the best approach to assure a positive outcome for all involved and a thriving business relationship.
Richard Ellis is executive vice president for PNC Bank Corporate Banking in central Indiana.