See More: Articles

Is Your Bank About More than the Numbers?

Gelman, Rosenberg & Freedman CPAs is a member of CPAmerica International, an association of CPA and consulting firms that provides industry knowledge including insightful articles, to help member firms serve clients and other individuals and organizations.

When choosing a bank, many business owners neglect to evaluate one of the most important functions a financial institution can offer: a longstanding and supportive commercial lending relationship.

Too often the choice of checking accounts and other services is the primary focus, and the issue of accessing a loan doesn’t arise until money is needed.

putting money together puzzle pieces

Banks vary in the appetite and interest they have for lending to various sectors and sizes of businesses. If capital requirements are small, many large institutions use automated scored products that depend on criteria such as net income, debt ratios and credit scores.

Other banks are more hands-on, and loan officers will spend one-on-one time with businesses of all sizes. The loan officers themselves, as well as commercial credit underwriters, tend to have varying comfort levels with different industries. This is due to perceived risk as well as their experience in lending to those sectors.

Lending decisions are based on a mix of factors often called the “5 Cs of Credit” – character, capacity, collateral, capital and conditions. Despite a reliance on numbers in analyzing the strength of a business’s loan package, the elusive element of character influences the decision.

Character is measured to a certain degree by credit reports, payment histories and timely filing of tax returns and corporate registrations. Work history, business performance and education are also factors.

Trade and personal references help paint the picture. The lender looks for evidence that a borrower is honest, reliable and trustworthy – and likely to repay the loan.

The relationship between customer and loan officer is another factor that builds trust and can make the difference between denial and approval. In addition, banks frequently offer better interest rates and terms to long-term customers.

Supportive bank relationships are a defense against failure in difficult times. Even business owners with a perfect credit history can face financial problems in times of recession, disaster, divorce or ill health.

An experienced loan officer will work with a client to stabilize the situation and work out of it. In the worse-case scenario – impending bankruptcy – a bank would rather perform an orderly wind-down than foreclose. A loan officer can grant extensions, allow interest-only payments or refinance loans.

A lesser-known way to tap capital is to draw back on a partially repaid loan, such as a business mortgage. Additional months are added to the “back end.”

Traits to look for when interviewing potential loan officers include approachability, communication skills, willingness to answer questions and consider options, industry experience, and an understanding of business opportunities and challenges.

When submitting a loan request, a complete and thorough package not only will make a good impression, but will facilitate a quick answer. Paperwork usually sits on the loan officer’s desk until everything needed for underwriting is provided. It’s helpful to think about a loan application from the bank’s point of view to ensure that possible questions and concerns are answered up front.

In addition to character, this is how a loan request is evaluated considering the other four Cs of credit:

Capacity – Capacity refers to the ability of the borrower and business to repay the loan. To determine this, the business cash flow is calculated by looking at net income on tax returns and adding back certain items like interest, depreciation and one-time expenditures. This adjusted income is divided by annual debt payments to arrive at the debt coverage ratio. Most banks like to see a minimum of 1.25 coverage.

Household income and debt will also be looked at to see if the borrower has additional capacity to repay a loan. The borrower should provide three years of business and personal tax returns; a schedule of debts including balance, payments and term dates; and bank statements.

Collateral – The current market value of assets owned and to be purchased with a loan is assessed. Banks have guidelines as to how much of an asset’s worth they will finance – for example, 80 percent on real estate.

For working capital loans, they often attach business assets. Sometimes business owners pledge personal assets to make up a shortfall, or additional cash will be required for a down payment. A schedule of all assets owned, associated existing debt and updated depreciation tables should be provided.

Capital – The bank will determine the business’s financial stability by dividing total liabilities by equity to calculate the debt-to-equity ratio. Equity is the net worth of a company (assets minus liabilities) and is comprised of owner investments and retained earnings.

Desirable ratios vary by industry. A current balance sheet should be provided. Accounts receivable and payable statements may be requested. A personal financial statement will be required to disclose personal assets and liabilities.

Conditions – The business environment, industry outlook and specific opportunities and challenges faced by the applicant are considered. It’s at this point that a case is made for financing, whether it’s to purchase a building, add a product or service, or buy new equipment.

The length of the business plan required to address conditions will depend on the age and stage of the business as well as the complexity of the proposal. A business plan usually includes history and outlook for the business, purpose of financing request, description of products and services, management, financial history and market analysis.

Supplemental materials may include leases, contracts, product information, resumes, industry data and marketing materials.


For the past nine years Gelman, Rosenberg & Freedman CPAs (GRF) has provided high quality audit and tax services for Doorways for Women and Families.

Caroline Jones |  President/CEO
Doorways for Women and Families