On August 26, 2011 Mike Flynn, former publisher of the Puget Sound Business Journal and now active in the world of raising capital, spoke at my Rotary Club. When talking about banking he said the following.
“The most important change [in banking] is that the days when a business owner could get new capital without putting up a key chunk or himself or herself are over. The point now being made by those with money to place is this: If you aren’t confident enough in your business and its prospects to mortgage your house and put your lifesavings into it, then why should have I confidence in you? Now is the time for maximum skin in the game. As the chairman of a Washington State based bank told me later when I asked him about that, he said: “That should always have been the case. It wasn’t. But it is now. And it will be in the future.””
This is very well stated. I often hear from business buyers and owners that, “The bank doesn’t want to take any risk on this deal or with my company.” I have to explain to them that banks aren’t in business to take [excessive] risk; they are in business to get paid back. It appears banks are moving back to the five C’s of credit.*
My experience is that if it’s a good deal (for the borrower and the bank) that banks will make the loan. A good deal means adequate debt coverage, a quality borrower and enough collateral (which can be the cash flow, especially in SBA guaranteed situations).
* Capacity, capital (your skin in the game), collateral, conditions and character.
“A good idea plus capable men cannot fail; it is better than money in the bank.” John Berry