The most important question you must answer about your borrower

As a lender, you have three questions to answer before you can say 'Yes' to their loan request:

1. Would the borrower pay the loan if they possibly could?
2. Does it look like they can pay it from operating income?
3. What is the back-up plan in case they can't?

However, the answers to numbers 2 and 3 are not even relevant if you can't get the right answer to the first question. What you are trying to determine with the first question is:

• Could you do this deal on a handshake?
• Is their word their bond?
• Do they keep their promises?

The most important decision the lender will make about the business owner is whether you can trust them.

Yes, this is subjective and you won't find the answer specifically in any of the documents provided.You will find it by how the owner says what they say to you and your interpretation of the documents they provide.

Tax Returns

• Do they report all their income or do they confide in you, the lender, that they do some of their work under the table'?
• Does the company pay for the owner's personal cars and travel?
• Does the owner resist providing the tax returns and schedules you request?

Conversation

• Does the owner brag about deals that might sound underhanded (even if they aren't) without providing the full context?
• Does the owner come across as someone who is ruthless in business (in a bad way)?

Follow-Through

• Does the owner provide the interim financial information they agreed to on time?
• Or does the lender have to keep hounding the owner for information she promised to send?

Impressions count

Everything the business representative does, everything he says, and everything the company provides to the lender should be run through this 'Character' filter. If the business and the business owner do not pass this test, their ability to pay and the strength of their collateral and personal net worth will be irrelevant.

Get to 'yes' with the first and most important question. Then move on to questions 2 and 3.