In the world of extending credit to a borrower, the management and control of risk are essential to a banker. What does the business’ cash flow look like? Does the owner have sufficient equity in the business? What types of assets will serve as collateral? Is the business model structured to foster growth? If things go wrong, is there an ability to repay the loan? These are just a few of the many questions that must be answered when screening a potential borrower. In an increasingly competitive lending market, it is critical to know your credit policy in order to effectively deploy and manage the bank’s capital.
Managing Credit Risk
Every bank manages risk differently. If this was not the case, there would be one enormous bank, with quite a large credit box, making loans to most businesses walking through the door. Most banks have developed industry niches, where they have expertise working with certain types of businesses. Given today’s market competitiveness, there are even niches within niches. Let’s be honest; if a strong, creditworthy prospect knocks on your door, the likelihood that the business is looking at other banks is high. Knowing the ins and outs of your credit policy can give you a leg up on the competition to better serve your customers and build your book of business.
Getting to Know Your Credit Team
Today, many banks are set up with bifurcated credit and lending departments. The lenders are out developing business, while the credit team is at home base combing through information and underwriting the deals. It is sometimes the case that the players on the lending team don’t fully understand the game plan of the players on the credit team. As a lender, in order to pre-qualify deals and be more efficient in serving the market, it is important to learn as much as you can about the credit team’s game plan. Credit policies are not static; they are constantly adjusting to economic and regulatory factors.
A Changing Credit Landscape
Over the past several years, banking regulations have become more stringent and limited the loan structures that banks are allowed to offer. The implementation of the thousands of pages of the Dodd Frank Act has transformed the way banks at all levels are able to do business. The rules set forth to keep big banks in check have had a negative impact on smaller community banks and Main Street businesses. Regulatory requirements have become so cumbersome that they are arguably the largest concern of bankers and the most significant growth barrier for the foreseeable future. All of these regulatory changes and increased reporting requirements have led to the tweaking and tightening of the credit policies of most banks.
Alternative lenders like VCF are not inhibited by the strict regulations that community and large banks operate under. Having a full understanding of your bank’s credit policy will go a long way in serving potential customers. Flexible, creative solutions are what we offer at VCF, and when a credit doesn’t quite fit in your bank’s credit box, we are here to help extend the credit box and make the deal work.
To learn more about VCF’s products and how to extend your credit box, please visit vcfnow.com or give us a call today at (804)-897-1200!