Small Business Banking Considerations

By James R. Devine

Financial Institutions across the country are re-energizing their business banking efforts as a renewed interest in credit is on the horizon. There is a lot of enthusiasm for building credit relationships as the pressure to deploy underperforming deposits continues to grow. Today’s informed banker knows the average business deposit balance ($20K) is larger than the average consumer balance ($5K), and the average business loan ($225K) is larger than the average consumer loan ($25K). They also know businesses typically use a wide array of additional financial services; so the cross-selling opportunities in a small business relationship has tremendous upside potential. Business banking relationships can be 3 to 5 times more profitable than the typical consumer relationship. Successfully banking small businesses is one of the keys to sustained profitability in banking.

The question has always been, “How do you effectively bank the small business market segment?” Centralization and product standardization coupled with automated tools have enabled larger institutions to make quick and effective credit decisions. But, how has this impacted the typical small business owner? When asked, they say:

  • I like the credit decision response time.
  • I dislike being a number in a database, as it has hurt or eliminated my personal relationship with the bank.

That being said, business owners want access to credit.

They want to deal with someone who understands businesses and better yet, their business. They’re looking for business advice that will enhanced their operating performance.

There is a real window of opportunity for a financial institution that wants to step up, and provide value-add service to the small business market. Institutions that effectively address the following considerations will have demonstrated a commitment to the market, and they will win the battle.


For any financial institution it comes down to answering these key questions:

  1. For their financial service’s needs, what will make a small business owner decide to utilize your financial institution over any other?
  2. What will make the financial institution experience better, and what will induce business owners to buy additional products/services?

Building a strong long-term relationship with small business owners starts with providing reasonable access to business credit. So, what’s your plan for providing credit services? As small business owners walk into your financial institution looking for working capital support as well as equipment and facilities financing, how are you going to deliver?

Their initial assumption will be the person they’re meeting with is a small business expert, who understands how to structure business loan requests. They’ll also assume that he/she intimately understands your institution’s lending policies and procedures. Does your staff have previous small business lending experience? Have they been adequately trained? Can they walk the talk?

Federal regulations require you to review a prospective borrower’s historical financial statements and tax returns as well as current personal financial statements and tax returns from the principals. As you review and analyze this financial information, make sure your focus is soundly based on a credit provider’s point of view. Given today’s pressure and an abundance of credit opportunities, the tendency might be to let enthusiasm prevail over sound credit analysis. Don’t let enthusiasm associated with this opportunity put your institution into a ready, fire, aim mode. Make sure your people are properly prepared. Fall back on the old lending adage we teach in Hipereon, Inc’s. business banking curriculums, “The harder I work, the luckier I get!”

Good credit policy is all about managing risk from a lender’s perspective; don’t forget, you are in the lending business. You have to thoroughly understanding the operating cash flow characteristics of your prospective borrower to assess the likelihood you’ll get repaid. You are taking a calculated financial risk for a defined rate of return. There is no ownership return upside (15%-25% return) available to the lender. Your return will only be, “Prime + 2%”, regardless of how well the business performs.

Your business bankers should not be taking ownership risk for a loanership return! Your job is to assess the risk associated with getting repaid without taking ownership risk in the process. A critical part of your business banker’s job is to properly structure the loan request. The loan structure should be designed based on the borrower’s cash flow capacity to pay you back.

Your analysis of cash flow should drive the terms and conditions of the credit request. The borrower’s repayment terms must be cash flow affordable. Never forget the theme song from Hipereon Inc.’s Commercial Lending School, “If the cash don’t flow, the loan don’t go!”

Your bankers must also have the ability to communicate effectively with small business owners. The typical small business owner does not have an MBA or CPA designation after their name. So, don’t complicate your communication with technical financial terms that confuse or intimidate them. The objective is not to impress business owners with how smart you are, but to know they clearly understand what you are saying. Be practical and use a common sense dialog to develop your contact relationships.

A logical extension of this communication linkage involves education, financial literacy. Your institution should plan to provide small business owners with access to good financial management training. The better they are prepared to understand their own fiscal condition, the better credit risks they will prove to be for your institution.

If you plan to use branch personnel as part of the relationship management process, make sure you provide them with adequate training to handle this additional responsibility. The better prepared they are to act as a key small business contact, the more effective your overall relationship management and cross-selling efforts will be.

Don’t get enamored with the value of collateral. Often referred to as CRAP (Can’t Render Annual Payment) at Hipereon, Inc., collateral will always be a secondary source of repayment. Building materials inventory, semi-trucks and logging loaders will not fit into your vault. A piece of commercial real estate won’t either. Don’t over emphasize the collateral value of real estate. All you need to do is look back at what happened in 2007-2008, or to the S&L’s in the early 90’s when they became fixated on real estate collateral. As we have seen several times, commercial real estate can actually go down in value!

The real financial leverage in the small business market comes from depth in relationships. The key to stability and long-term profitability is having multiple products and services relationships in place (target at least 4). To get to this enviable position you need to get strategic, it takes nothing short of a dedicated hands-on approach. Roll up your sleeves, and go to work with your business owners. Show them you are committed.

As stated earlier, it all begins with providing reasonable access to credit. Unfortunately there is no magic formula for approaching the credit business. It is hard work that requires a thorough diagnostic assessment.

You have to develop your people to use proper analytical techniques; or you may decide to use an outsourced underwriting support service to supplement your analytical efforts and reduce some of your initial staff costs. If you go this route, make sure your service provider has the ability to quickly and efficiently spread financial statements and provide a well-structured fundamental financial analysis. You still need someone internally that can evaluate the quality of their work.

Realize they can’t do a thorough and timely job for you unless they receive all of the required information. Incomplete information will cause the process to start, stop, and start again. You will likely lose any time and cost leverage advantage if you don’t supply your outsourced provider with complete information packages up front.

It is your job to gather the necessary data and manage all of the direct contact activities with the prospect.   Expect to receive the results of their analysis within 3-5 days.

An internal or external analysis should address a prospective borrower’s; liquidity, solvency, leverage, profitability and cash flow performance. In the normal course of business, does the prospective borrower have the cash flow capacity to pay you back?

Don’t assume your outsourced provider will make your credit decisions for you. Their role should be structured to simply support your internal decision-making process. It is still your decision to make.

Make sure you keep an eye on the business owner’s perspective. They are looking for services to help them become more successful over time. They want to know you are committed to this end, and are deserving of their trust and commitment.

The financial institutions that make the organizational commitments to; build a sound foundation under their business credit services efforts will have a significant opportunity to bank the small business market. Financial institutions need to stay focused on the fundamentals, and don’t look for the quick and easy fix. Success in the small business market is an earned right.

Do Your People Need To Be Trained?

By Robert J. Hogan

In the world of business banking the two primary objections to training have remained constant over the years; it takes too long and it costs too much. Then there is the fear, that as soon as I get them trained they find a better job. From this professional’s viewpoint in today’s small business lending market, those attitudes are unsubstantiated and outdated. First, training or talent development needs to be viewed as an investment. An investment means for the expense you incur today, you are expecting long term sustainable returns in the future. A training investment means your institution is committed to developing its most precious asset, its People. It demonstrates your organization has recognized their worth; and is interested in making them more productive, and a more valuable asset to the institution and to themselves. It is common knowledge people who often view themselves as important to an organization are those the institution has made an investment in. From their perspective the institution has made a commitment to their development, to their future value, which they view as priceless.

Second, the question that needs to be asked is, “What’s the cost of not being properly prepared to do the job?” In business banking that could mean the loss of having to write off a non-performing loan, or simply the loss of not getting the business. If proper training prevents making one bad business loan, it could potentially save your institution thousands. For example; in today’s market writing off a typical small business loan of $225,000 (which results in a hit to your equity), with a net interest margin of 3.0%; requires the institution to find $7,500,000 in incremental assets to replace the equity. This represents the institution’s true cost of the write-off (225,000/.03 = 7,500,000). A cost which would typically pay for training the institution’s entire staff several times over.

I believe the third concern can be addressed by a famous American author, Zig Ziglar who stated, “The one thing worse than training people and losing them, is not training them and keeping them.” Think about the ramifications of that statement for a minute or two. That sentiment is never more profound than when you are discussing your institution’s staff responsible for lending to or providing services for the small business market.

Commercial lending takes people with experience, sound judgement and a solid educational background in diverse business subject matters. Good commercial bankers need to be versed in subjects ranging from; accounting basics, entity structures, financial statement analysis, risks assessment to cash flow determination. Commercial bankers need to be business model experts. We at Hipereon Inc. believe to be an expert; you need years of seasoned experience combined with proper business training/education. It generally starts with proper education/training.

The following skill assessment survey helps you evaluate your organization’s business banking training needs. Please complete the following survey questions to design a program that meets your organization’s specific skills development needs.


Skills Assessment For Commercial Bankers

How many lenders/staff members need to be trained?

What is your desired time frame, i.e. 2nd Qtr, etc?

What is your primary training objective?

Skills Assessment:

Individuals involved in commercial banking need to be very versed in the following subject matters. Identify topics where your business bankers or other staff members could use additional training. Ask yourself, “Does my staff have a solid understanding of, and are they conversant in each of the following subjects?”(check each subject matter you’d like additional training):

Basic Accounting

  • Nine governing principles of accounting
  • Cash vs Accrual comparison
  • Four basic business transactions
  • Cost-Volume-Profit Analysis
  • Different Capital budgeting techniques

Financial Statement Analysis

  • Income Statement construction analysis
  • Balance Sheet construction analysis
  • Cash Flow Statement construction analysis
  • 14 critical financial relationship interpretation
  • 5 Predominant Roadblocks to Profitability
  • Performance deviation calculations

Financial Statement Analysis

How to analyze & identify risks for different industries:

  • Service Companies
  • Retail Companies
  • Wholesale/Distribution Companies
  • Manufacturing Companies
  • Construction Companies

Financial Projections

  • How to analyze income statement projection logic
  • How to analyze balance sheet projection logic
  • Discover meaning of financial gap
  • Discover 9 critical cash determinants
  • Discover the SAF law
  • Learn to calculate sustainable growth rates
  • Learn 6 growth management strategies
  • Learn “Method B” cash flow
  • Learn how to develop cash budgets
  • Learn how to conduct cash sensitivity analysis
  • Learn asset financing patterns – proper debt structure

Making Effective Sales Calls

  • Learn business life cycle characteristics
  • Identify effective probing questions
  • Match needs with proper solutions

Credit Memorandum Preparation

  • Debt Service Coverage
  • Repayment sources, primary, secondary, tertiary
  • Loan Covenant Discussion
  • Examine Loan Doc/Loan file checklist

Additional Desired topics


Testing/Daily Quizzes desired



After completing the survey and identifying your staff’s strengths and weaknesses contact small business experts, like Hipereon Inc., to design a curriculum specific to your needs.

The Cs of Credit

By Robert J. Hogan

The accounting profession has Nine Governing Principles, the legal world has Two Ruling Laws, and commercial banking has 5 Cs of Credit. All these dictate a culture, a train of thought or a logical view of their respective professions. In banking whether you’re a trainee, a junior lender or a seasoned professional; the 5 Cs of credit serve as a lead chapter in the industry’s banking bible. For years the traditional 5 Cs of Credit have been the ruling doctrine for granting credit; they represent the foundation of fundamental credit analysis and frame the credit decision making process. The Cs of Credit help lenders transition from financial analysis to credit analysis, they help lenders examine the big picture, and they put the credit request in the right context. The 5 Cs of Credit are; capacity, character, collateral, capital and conditions. The following examines each C of Credit, and defines what lenders are evaluating in a pending credit request:

Capacity examines whether the borrower has the capacity or ability to repay. This is the most important and defining C of Credit. According to federal statues the ability to repay is supposed to be from the self-liquidating operations of the credit, i.e. from normal business operations. The question is whether or not the business can generate the cash flow required to service the debt. The cash flow needs to be sufficient to provide the lender with a cushion; generally referred to as a minimum debt-service-coverage (DSCR). In most institutions this runs somewhere between 1.2 and 1.4. The most common DSCR is 1.25 which means for every $1.00 of debt service (paying back interest + principal) the business needs to generate $1.25 of cash flow. From this professional’s point of view, nothing trumps cash flow’s ability to service debt. In our commercial lending school this statement cannot be stated too often, “If the cash don’t flow, the loan do go.”

Character examines whether the borrower demonstrates a willingness, or has a track record of a willingness to repay. This is probably the 2nd most important C. It measures whether the borrower stands behind their commitment to repay. Are they good for it? The banking industry was founded on the good faith of a handshake; as people stood behind their word, as it represented who they were, it defined them. Unfortunately, today’s world is a little more complex and sometimes unforeseen things happen.

As lenders we need to know whether the borrower we’re dealing with stands behind their commitment. Do they have the determination to pay us back? Lenders today rely on credit reports, credit scores, your reputation, and their own experience with the borrower to help them establish character.

Collateral is the secondary source of repayment; it pledges other assets against the loan in case the primary source of repayment (cash flow) fails. Sound credit policies and procedures require all loans to have a secondary source of repayment; a back-up plan to minimize the risk. Collateral supplies a lender with that back-up plan or a sense of security. In banking, when there is too much pressure being put on booking loans, there can be an over reliance on collateral. There is a mentality that states, “If you got the dirt, you can’t get hurt.” For commercial loans the most common form of collateral is real estate; there is something about the security of a commercial building. However, from a lender’s perspective the question always needs to be, “How are you going to convert the collateral to a source of cash flow?” So, there will always be two issues associated with any collateral; 1) How are you going to get legal and physical possession, and 2) How are you going to convert the collateral to cash?

Capital measures the risk in the credit request. The ultimate question is whether the borrower has any skin in the game or not. As a financial institution for a return, you are only going to get Prime + 2.0% period, as such, you should not be taking on all the risk. The borrower needs to have something at stake, they need to lose something if the transaction falls through. Most financial institutions today will accept a maximum debt to equity of 3.0 to 1.0; which means if your borrower has $100,000 of equity, the maximum outstanding debt they can have is $300,000. Given today’s regulatory environment the importance of this C is right up there. Financial institutions aren’t going to take on excessive risk. They simply aren’t going to do it.

Conditions measure outside forces, and the probability of whether or not we’re going to get repaid. It examines the state of the economy on a national and local basis. It examines the borrower’s industry and the condition of the business itself. And it evaluates and predicts the likelihood of whether or not the business can generate the cash flow required to service debt at a predetermined level. Conditions is the process of the lender stepping back; examining the big picture, and examining the context of the credit request.

The previously mentioned 5 Cs of Credit have admirably served the banking industry for years. When consistently followed, these 5 Cs have built a solid umbrella over the credit decision making process. At Hipereon, Inc. we acknowledge the applicability and sustainability of the traditional 5 Cs, however, we believe the Cs of Credit need to be brought into the 21st century. We believe they should be expanded to 8 Cs. We believe today’s; regulatory environment, market risks, and economic pressures justifies having 8 Cs of Credit. Our proposed 3 additional Cs are:

Compliance measures whether or not the credit request is in compliance with federal/state regulations, and is consistent with the institution’s business plan. Even if it complies with regulatory statues, is it something the financial institution strategically wants? It the credit request one we’re looking for, or is it one we’re reacting to? Did the institution go after it, or did the request seek us out? As a financial institution we need to be strategically focused; we need to know who we want to serve, what we want to offer, and how we’re going to deliver.

Cost-benefit measures whether or not the institution is being adequately compensated for the contemplated risk? Are we risk based pricing? Did we price the request competitively, or did we price the request to get the deal? As a financial institution, are we adding value to the transaction to justify the price, or are we being the cheapest deal in town and trying to match the competition. At Hipereon, Inc. we don’t subscribe to being the cheapest, or being the easiest business model. We believe financial institutions should price for the risks associated with the credit request.

Caring evaluates whether the lender or the institution is committed or not. The question is; “Is this an industry sector, Is this an individual, and Is this a credit type that we care about?” Does the lender and/or the institution have an affinity for this type of credit? Do we have expertise in this area, and is it something we’re interested in?

Incorporating the Cs of Credit into your credit decision making process will enhance your institution’s credit portfolio. There are no guarantees in business banking, all we can hope for, is to increase our odds of getting repaid. In your credit underwriting process; whether you use the traditional 5 Cs of Credit or Hipereon’s proposed 8 Cs of Credit you’ll be taking a step in the right direction.