We read a lot about struggling small businesses who are crippled because they cannot get funding. I wanted to find out locally what is going on so I asked Mike Donaca who is vice president, commercial relationship manager at Umpqua Bank. Here are his responses to my questions.
1. Is it true that banks are not lending to small businesses today?
“While it is true that lending has changed in the past couple years and that the level at which banks are lending throughout the nation has decreased, strong banks, such as Umpqua Bank are continuing to lend. In fact, Umpqua Bank originated more than $1.7 billion in new loans during the past 12 months alone.
What we’re seeing on the national scale is that banks are lending at a smaller level than they have previously. Locally, we’re seeing similar trends for a number of reasons. For some banks, the change is due to a need to conserve capital; they can’t afford to put more loans on their books. This may be due to government mandated orders called “cease and desists,” or prudent balance sheet management which requires weaker banks to maintain or increase their capital ratios. Such actions come at the expense of new loans for businesses and individuals. In other cases, banks may have strong capital and liquidity making them ripe and ready to lend. The issue in many of these cases is that businesses have cut back on the loans that they’re applying for and are reducing their debt in order to weather the market downturn.
The business lending environment weighs heavily on the individual bank’s situation and on the type of lending a company is seeking; yet the core principle of banking remains the same: bankers are eager to lend. At Umpqua, we recognize the challenges facing businesses today and have set up a specialized small business lending program, Main Street Small Business Lending, to help make sure that qualified companies receive the funding that they need to operate and grow their businesses. Should a company seek a business loan for a new piece of equipment to help grow their organization and they have the financial strength to support their request, chances are they will receive the funding that they need.”
2. We hear that personal guarantees are a must. Is that true?
“Yes, in almost all situations personal guarantees are a must. There are some situations, such as with large, publicly traded companies, where a guarantee of owner is not viable, yet even in these situations banks protect themselves through the use of loan conditions (covenants) or other means. Personal guarantees illustrate that the borrower believes in their business, future viability, and ability to repay the loan within the initial terms set forth.”
3. What do you look for in small businesses today?
“There are no specific answers to this question as businesses differ widely. One of the benefits of being a community bank is Umpqua’s ability to get to know our business customers. At Umpqua, we take time to understand the workings of our potential borrower’s organization, review current and past financials, appreciate the “why’s” behind trends or one time occurrences, visit their place of business and build relationships with the owners and personnel of the company. As a result, our seasoned lenders gain a deep understanding of our potential borrowers’ businesses and are able to write successful loans for their companies.”
4. Are the 5 C’s of credit still viable today?
“The five C’s—character, capacity, capital, conditions and collateral—are arguably as important, if not more important, today than ever before. What has changed is which of the “C’s” are the most important today versus a few years ago when the market was constantly moving up and hiding problem areas. Different loan officers may order the five C’s differently, yet I would say that capacity to repay and character are the two most important C’s in the lending equation.
Historically seasoned loan officers, credit administrators and management agreed that character was the single most important “C” in lending. Many have said that, “one can never mitigate one’s character, while the other “C” can sometimes be mitigated to make the deal happen.” Today, you may have a borrower in front of you with the highest of character, yet the world has folded around him or her and there is no way for the borrower to repay the loan (no capacity). In these situations, even with the highest of character scores, the borrower just can’t make the payments to repay the loan.
1. Character is the willingness of the borrower to repay the loan. For most, there is not a quantifiable measure to judge character. Most lenders agree character is the most important of the five C’s; it cannot be mitigated.
2. Capacity refers to the company’s ability to generate sufficient cash flow from normal operations to meet future obligations. To the lender, this represents the primary source of repayment for a loan and is the most critical of the five C’s after character.
3. Capital, also called equity, consists of common stock and retained earnings. Usually this is a negative sign if the owner’s equity is considerably less than the capital provided by its creditors.
4. Conditions are external variables such as the economy, industry type and trends.
5. Collateral is the asset or assets pledged to secure a loan. This includes Accounts Receivable—equipment, real estate, etc.”
Theresa Freihoefer is an assistant professor of business at Central Oregon Community College. She comes to the College with a wealth of real-world experience in business. Professor Freihoefer can be reached at tfreihoefer@cocc.edu. You can contact Mike Donaca at mikedonaca@umpquabank.com.
