5 Interview Questions to Choose the Right Lender For Your Business
When a business knows exactly what type and the amount of financing it needs, it’s time to find the right commercial lender for you.
Easier said than done.
Banks are like a commodity - they all offer the same products, lend money the same way, pay interest on deposits, and boast about how relationship focused they are.
It’s hard to pick out the best commercial lender for your business because this is a long-term relationship.
The best bankers will set you up on a right path to grow and provide guidance and financial support along the way.
Get it wrong and you will find yourself frustrated and angry when your bank doesn’t support your goals. The amount of administration and legal work involved makes it time consuming and costly to change banks.
When choosing the right lender for your business, you need to interview them to find the right one.
Here are 5 questions that I pay special attention to:
- Can you explain how the proposed credit facilities will impact my company?
This question is asked when the banker has already presented a term sheet for discussion.
The purpose of this question is to see if the banker fully understands your business.
An experienced banker will be able to describe all of the benefits and pain points about the type of financing proposed. Every credit facility has its limitations but business owners don't know what these limitations are. Business owners don't experience the pain points of a lending product everyday but the banker does.
For example, if a margined line of credit is proposed to lend against the company’s receivables and inventory, the banker should speak to the ebbs and flows of your sales and inventory cycle based on the seasonality of your business. The banker should talk through potential issues during a slow season and how this will impact margin availability when cash is needed to fund the next business cycle.
If the banker can clearly articulate and explain concepts that are unique to your business, this demonstrates that they fully understand how your business works. This makes the banker a useful resource in the future because they will be able to foresee potential financing issues ahead of time.
- Which layer of management would I have access to within the bank?
The purpose of this question is to see how much support is provided internally within the bank.
Business and banking are all based on relationships. When you can call on somebody senior within the bank during distress situations, this gives you a huge amount of comfort knowing that you have support from within.
If your interactions are limited to just the banker, this means your voice can only be heard at surface level. You become reliant on the banker relaying your message clearly and effectively within the bank. Sometimes, this can lead to a game of broken telephone, that you don't want to play.
This is also important for the continuity of the business relationship with the bank. Bankers are humans who naturally look for promotions to progress within their career. This means turnover of your banker should be fully expected. Once they are gone, you will have to build a relationship with another banker, which takes time and energy for both yourself and the banker to become familiar with each other.
Having access to senior management above the banker, any changes to the banker will have less impact to your banking relationship because you already have rapport with the senior managers (who don't turn over as often).
- If my business was operating fine and a random event derails the business, resulting in net losses and covenant breaches, what would the bank do?
This question tests the bank to see how they would react in a distressed situation. The right answer is the bank showing continued support for the company.
When business is doing great, the relationship is easy to manage. The true test is when the business is underperforming because in distress situations, everybody is looking out for their own best interest.
The key part of this question is that the business was originally operating fine. The business was well managed and had no issues with sales and maintaining profitability. The distressed situation was caused by a random event.
Since the event is outside of management's control (i.e. product recall, natural disaster, pandemic), there was no fundamental issues with the business model prior to this event. The question becomes whether or not the bank believes management can weather this temporary disruption to return to profitability. If there were no underlying issues with the company's performance prior to the event, there should be no reason to believe the company can't return to where they ones were.
Beware of the bank sugar coating this question to say nothing will ever change and the bank will always remain supportive. This is a lie.
In distress situations, banks have an obligation to their shareholders to protect its assets. There will be times when banks will want additional scrutiny over the company's financials to make sure the path to profitability is valid. When the bank tells you the good AND the bad, that’s when you can trust them.
- Can you introduce me to one of your bank’s clients for a testimonial?
As a consumer yourself, you look at reviews and testimonials before you make a purchase.
The business community is small. The bank's clients are likely in the same neighborhood or operating in the same industry as your own. Getting direct feedback from other businesses and entrepreneurs provides you with the best insight on their experience with the banker and the bank itself.
Is the banker responsive? Are the bank's operating systems reliable? Are there any pain points with this bank? These are some of the questions that are relevant.
Also, take the opportunity to broaden your own network within the business community.
- Where are the bank’s key decision makers located?
Understanding where the key decision makers sit within the bank is very important to long-term viability.
It is common for a bank's credit adjudication team to be centrally located in one part of the country. For example, a bank will have a team of credit approvers working from their headquarters while bankers from all parts of the country work locally within the communities to source deals.
When the banker submits a credit application for a loan approval, will the credit approver sitting in another part of the country truly understand your business? There are many local business nuances that only a local coverage team would understand.
For example, a credit approver sitting in New York may not understand the full impact and recovery period to restore a business in New Orleans following a hurricane. This puts your financing at risk because they are the gatekeepers to getting your loans and requests approved.
If you have a key decision maker that understands your local market, this gives you great comfort.
Summary
When you are on the hunt for a new commercial lender, bankers will ask you 100 questions to get to know your business. Take this opportunity to ask the bank questions as well.
The 5 questions outlined above will help you find:
- A banker who knows your business.
- A bank who is willing to provide senior level support.
- A bank who believes in your management team.
- A bank who has nothing to hide.
- A bank who knows your market.
Banking needs to be treated like a long-term commitment. So before you commit, make sure you know what you’re signing up for.
That’s all for today. See you next week.
Cheers!
Lawrence
That's it for this week. Thank you for reading Financing Journey. See you next Saturday.
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