How to Pick the Right Lender

There are many lenders into today’s marketplace, providing a dizzying level of loan options for acquisitive companies. Some lenders offer only a portion of the total capital need, while others can provide a one stop shop.  Some are established and some are new.

Regardless of their focus, all lenders have a few things in common – they all have a 1. Credit risk philosophy and a 2. Unique business personality.  Credit risk philosophy are the risk principles the lender has enshrined to guide their credit decisions.

Many lenders use internal credit rating models, or regulatory guidelines for this.  Other lenders balance this with an override approach allowing more subjectivity in the process.  Credit rating model based lenders tend to overweigh external data such as industry type and peer benchmarked profitability.

These lenders see credit decisioning as more of an exact science that can be controlled through focusing on the right combination of analytical variables.  Lenders that use more subjectivity tend to be more focused on the quality of the company and the character of the management team.

While they look at external data, they use more of a gut approach, to inform their decision.  While both approaches can work for the lender, they involve vastly different processes and both pose different types of risk for the prospective borrower.

Lenders also have very different engagement styles with borrowers, based on their corporate culture and company personality.   Some are very warm and interested in building a long term relationship, while others are more transactional.

Large lenders tend to be highly compartmentalized, where you may get warm treatment on the front end, and colder treatment from the underwriters and portfolio managers on the back end.

From the perspective of a borrower – the key questions in picking a lender are 1. Will they be able to close the loan? ; 2. How easy will they be to work with going forward?  It’s hard for an inexperienced borrower to gauge this from the beginning.

Lenders are very skilled at presenting themselves as reliable and partner-like, while the underlying reality may be starkly different.   So here are our 5 tips for breaking down these unknowns, and helping inexperienced borrowers to discern the right lender to pick for their loan:

1. Ask them how they make credit decisions – every borrower has a right to have a clear understanding of the credit decision process, the major steps and the key decision makers. Any lender who presents it as a black box or somewhat opaque process, is someone you should avoid.
2. Inquire as to their historical track record of approvals – your chances of approval are very correlated to the quality of your loan officer and their track record of getting things done. You have a right to ask them how good they are at getting approvals.
3. Ask about Industry biases or problem credits – all lenders have favored and disfavored industries, perhaps as a result of a few companies that have gone bad. It is very important you make sure early on that you are not in one of those industries.  Despite how much your loan officer likes you, it’s unlikely he/she will get much traction internally.
4. Ask how much repeat business they do – good lenders are in the relationship business and borrowers continually return to them. This will give you an idea of their engagement style and their ease of working with post-closing.
5. Ask how they manage the loan post-closing and who your contact will be – lenders usually have different people on the front end and back end. It pays to meet the backend person upfront so you can be sure you can work with this person and their requirements.