In lending, every institution’s goal is to work with companies whose owners show great character. It can be argued that an owner’s character value is more important than the company’s collateral value. Character can be measured in a variety of ways; personal credit score, open communication, willingness to cooperate, and how someone conducts himself or herself in a meeting. Much of the measure of character goes to the owner and management’s experience and leadership. Ultimately, business revolves around human behavior and interpersonal communication. It’s often said, “It’s not personal, it’s business” but the fact of the matter is, business is personal!
We recently received a credit request from a commercial borrower who was experiencing significant sales growth with revenue expectations above ten million dollars in the near future. Looking at the last couple years of financials, the company had profitability in the hundreds of thousands and was well capitalized. The business was currently being financed by a local bank. However, the cap on the line of credit (LOC) provided by the bank was hindering the company’s growth potential. The LOC was for one million dollars, but the seasonality of the business coupled with the forecasted growth required a LOC of two and a half million dollars for the business to operate most effectively.
As we learned more about the company and the challenges facing them, we became confident that we could help and we were excited about the opportunity to work with such a great organization. The business owner and his management team had a great handle on the company and understood their value drivers and the differentiation they brought to the market. They had a huge growth opportunity in front of them and VCF was excited about finding a way to provide the working capital needed for the company to reach their goals.
As a non-bank lender, we rely heavily on the Character of the owners we are conducting business with; it is one of the most important aspects in ultimately making a credit decision. As we worked with this prospect, we were feeling good about the Character evaluation of the owner and management team. However, part of the Character test in our underwriting process is a credit check on the owner(s) of the business, which is standard operating procedure for most banks and non-banks. Every institution has its own risk tolerance when it comes to the FICO credit score from any of the 3 main reporting bureaus, Equifax, Experian, and Transunion.
When we ran a credit search on the prospect discussed above, we were surprised to see that the score was in the mid 500’s, below the firm’s minimum credit score threshold. The owner ran a very profitable business, had a substantial amount of capital in the business, and had a customer base of very reputable companies. While the business was performing well and the collateral supported the requested LOC, VCF rejected the financing request after discovering the low personal credit score of the owner. If someone is not in complete control of their personal finances, it is likely that they will not have a great handle on the finances of the business.
In over two decades of providing customized financing solutions to businesses, the possibility of default increases when a weak FICO credit score of the owner(s) exists. Because of this, the personal credit score of an owner plays an important role in our decision of whether or not a credit is approved. However, as we discussed in a previous blog post, a “no” today is not a “no” forever. A personal credit score can be improved over time and may be the missing piece that can turn a “no” into an “approved”. Character is measured in many ways, however it is critical to know your credit score and guard it closely!