5 Tips for verifying borrower information
In the underwriting and management of commercial relationships, bankers often trust the honesty of their borrowers. But it is necessary to dig a little deeper to assure a thorough understanding of how a borrower’s business is actually doing, according to Bob Viering, principal of River Point Group. Unfortunately, bankers do not have the time to verify information from borrowers as an auditor might. In this guest post, Viering discusses five tips for bankers to get more comfortable with the accuracy of financial information from their borrowers.
Trust but verify
By Bob Viering, Principal, River Point Group, LLC
“Trust but verify” is a quote often attributed to Ronald Reagan. But, if you dig a bit further, you’ll find the quote is actually a Russian proverb. Underwriting and managing commercial relationships is often like the proverb. We trust the honesty of our borrowers, but we need to dig a little deeper to assure ourselves that we understand how our borrowers’ businesses are actually doing. I have spent much of my career in credit management approving loans. I can see for myself if numbers are going up or down. I want to know why changes are occurring, why trends are occurring and where things are going in the future.
Most small to midsize business owners didn’t start their business because they were good accountants. They either have acquired the skill, hired the skill or aren’t there yet. While bankers do not have the time to verify information from borrowers as an auditor might, there are some things they can do to get comfortable with the accuracy of financial information from their borrowers.
1. Analyze Trends. It is critical to spread a borrower’s financial information to see any developing trends.
2. Look for Consistency. After spreading the financials, look for consistency. Does the trend in sales, cost of goods sold (COGS) and operating expenses make sense? You may see results vary widely from year to year with no apparent reason. Often there is a plausible reason. But if the borrower cannot explain these changes, then you must dig deeper to find the reasons. Are the financial statements consistent with the tax returns? While there is typically some book to tax differences, it should be a simple matter to reconcile the two. If not, then you need to dig to see which source contains the accurate information. How does the information compare with the borrower’s peers? Is the business following the peers’ results or is it going in a different direction?
3. Ask the right questions. This is often the most critical skill of a good banker. While it is important to make sure the information is accurate and makes sense, it is even more important to be able to understand what the information means. Talk to the borrower about any trends in their business. Why is the business going in the current direction? Where does the borrower see things going? How does the business plan on getting there? If the borrower’s information is different than its peers, it is reasonable to ask why. What are they doing differently?
4. Get to know the borrower’s business. Nothing makes the numbers make sense like seeing the borrower’s business in person. Does their inventory look like it is worth what is reported? Does it look current or is it covered in dust? Is the equipment being kept up? A few minutes online doing a search of the borrower’s business and industry can be very helpful. Plus, borrowers like it when their banker takes the time to get to know them and their business.
5. Have perspective. After you have analyzed the borrower’s information, the last item is to take a step back and ask if what the borrower is requesting, their financial information and their source of repayment all make common sense. If not, you may need to dig even deeper.
Good information is important. Good information, and understanding it, is paramount to making a good decision.
For more information on relationship-based banking, download the whitepaper, How to Balance Relationship-Based Lending & Risk Management.
Bob Viering is a former banking executive with large, regional and community banks and also started a de novo bank. After 30 years as a front-line banker, Bob started River Point Group. River Point Group is a community-bank consulting firm that works with banks in transition. Their work includes loan reviews, regulatory actions, preparing for sale/purchase, strategic planning and transition management.
The advice and views in guest columns are intended for informational and discussion purposes only and do not necessarily reflect the views of Sageworks or its employees.
