Beware the Risks of Signing on New Customers

On Monday morning, you receive two phone calls from business owners wanting to borrow money from your bank. The first is an existing customer who needs $1 million to build a new warehouse. Her company has never missed a loan payment with your bank, and it has a solid business credit score. The other has never applied for a bank loan. Instead, the owner has borrowed money from wealthy family members to grow his business. This borrower needs $1 million to build a warehouse. Which banking opportunity sounds more attractive?

Expanding your customer base

It’s generally easier to work with existing customers, especially if they have an established track record with your bank. But sometimes you need to branch out and pursue new banking opportunities. When you do, it’s critical to “dial up” your due diligence procedures.

By doing your homework, you may unearth hidden risks and liabilities. In addition, showing a genuine interest in business operations can help build rapport and trust — and win over a prospective borrower who may be simultaneously soliciting competing bids from other banks.

Leaving the office

Site visits can help you get to know the applicant on a personal level and give you an opportunity to inspect the business in person. Although it may seem old-fashioned, you can learn a lot from touring a plant, pretending to be a mock customer at a retail store or making casual conversation with employees working in the back office.

These days, every borrower — regardless of whether it’s new or existing — is expected to submit a mountain of paperwork to get a credit approval. But the document requests for new applicants can be downright frustrating. Face-to-face interactions on the customer’s turf can also make it easier when you need to call the owner to request (yet another) document for your underwriters.

Before going on a site visit, do some homework. If possible, conduct a preliminary review of the company’s financial statements, tax returns and business plans. Then compile a list of basic questions about trends or items that need further clarification.

Prior to the site visit, research the company and its owners on the Internet and via social media. Technology can provide easy access to local news stories and recent events. It can even reveal the owner’s personal interests, such as favorite sports, pets and vacation spots, which can help you make a personal connection with a new customer.

Researching unfamiliar industries

Another way to show your interest in a prospective borrower is to perform independent research into its industry. If you’re meeting with a customer who operates in an industry that you’re unfamiliar with, look online for information about industry trade groups and competitors. Learn industry jargon and figure out how the applicant’s business measures up, so you can have meaningful discussions with management.

Do you know anyone else who specializes in the prospective borrower’s industry? Think beyond your bank. Outside business contacts, such as accountants and lawyers, can also provide you with valuable insight into a prospective customer and its industry.

Modifying your approach

Evaluating financial performance and business credit risk requires a different mindset depending on whether you’re looking at an existing borrower or a new loan applicant. You’ve built a relationship with existing customers. Trusting new ones can be risky, especially if the company is a start-up venture without a proven track record — or the company operates in an industry you’re unfamiliar with. By going the extra mile, you can minimize the risks and maximize your return.

For more information on Smith and Howard’s commercial banking services, please contact Marvin Willis at 404-874-6244.