Banks Can Foster Better Borrowers

Banking's restrictive lending practices are a knee-jerk bureau-cratic solution, getting rid of the disease of charged-off loans and in the process killing the patient - entrepreneurs, the bank's customers.

No concern for the impact on the customer is apparent, and no meaningful changes for the cause of the bad-loan phenomena are forthcoming.

The banking profession itself is responsible for developing incompetent entrepreneurs because for years banks depended on growth to cover the interest and principle on lending, with no plan and no alternative solutions in the event of an economic downturn.

Two years ago I started my consulting practice based on the following observations:

* Most of U.S. business growth was emerging out of the smaller and medium-sized sector of the economy, while larger business was shrinking and consolidating.

* Small and medium-sized businesses cannot afford the outlay to bring aboard a chief financial officer, someone who could help grow the business. And as for CPAs filling that niche, their training is not in the business planning area.

Doing Without Business Plans

But most loans being made by the financial institutions apparently don't require business plans. It appears that most loans made from 1989 to 1991 were based upon collateral or good faith and not on the ability of the borrower to repay the money out of the cash flow and income from the business.

This led to big problems when the Office of the Comptroller of Currency rewrote lending requirements. The new guidelines - an oversimplistic reaction to antiquated lending practices by the banking industry - exclude start-up and small and medium size companies.

The result was the phenomenal growth of business bankruptcies over the past two years and further dramatic increases in mergers and acquisitions as well as failures in the banking industry.

When and Where to Lend

Now banks need to ascertain why they were lending money in the first place.

Good business plans are not accidental. Good businesses are not accidental.

A good business plan examines each aspect of the business: competition, management team, facilities, sales program, marketing program, research and development program, and future opportunities.

When I asked banking industry representatives in my community how they were going to deal with the new restrictions on lending, which results in reducing the number of times they can lend money and directly affects performance, the general response was: "We will just manage our existing loan portfolios closer."

What Banks Can Offer

This answer won't do. If the banking community is not well versed in business operations, what if any value can it bring to a troubled, recession-riddled company?

In the long term, the banking industry will require a new and dynamic leadership. Banking officers will have to quit playing a numbers game. Instead, these bankers are going to have to formulate sound decisions based on a clear understanding of a borrower's business.

Encouraging Discipline

I find it to be a sad statement of the banking industry that year after year it doles out bonuses, compensation, and incentives comparable to the private sector. Yet bankers get away with failing to do something as basic as maintaining a portfolio of realistic business plans from their customers.

Please note the word realistic. There were great plans for the Trump empire that were not realistic. The failure of the banking industry to require this standard resulted in fostering businessmen who are not prepared to meet the challenges of the cycle nature of the world economy.

The banking industry is the necessary evil of the business community. Without it businesses cannot exist, but businesses can be their own worst enemies if the banking industry does not require and insist upon a thorough business plan before lending can be done.

Any banker lending money must know which of four sources of cash are available to the borrower to repay the loan: net income, assets, investor contribution, and borrowing.

If none of those four cash sources are available to repay the loan, then you do not know how you will be paid back.

Personal Guarantee Falls Short

If you are betting on the businessman's fear of his personal guarantee or whatever security he has provided you to protect your shareholders money, you don't understand that the businessman will face this problem long before you will know about it.

If it means lowering his standard of living or changing how he does things, you might be surprised by the low priority a personal guarantee will get. Fear and ignorance are not good reasons to lend money.

If the banking fratenity does not understand the fundamentals of management, manufacturing, marketing, and operational issues facing a business, then what of value does a loan officer bring to the table?

Having followed behind banking officers as a chief financial officer over a couple of closely held companies, what I noticed is that a loan officer's strength lies in the credit area.

Shortcomings of Training

Banking industry training has generally been weak in the management information systems area. This weakness became very apparent in the early 1980s in the area of cost accounting systems when zero balanced checking accounts were demanded by industry and the banks did not know their transactions costs very well.

Also knowledge of tax reports, relevant human resources development techniques, and creative alternative sources of cash and product development were not a strong point of my banking predecessors.

What this implies is that loan officers are not multidimensional. And yet the pay scales and incentive plans reflect a high enough level to attract multidimensional personnel.

The Way of the Railroads

Is the banking industry like the railroad industry that lost sight of what is business is about.

If you need the Office of the Comptroller to tell you that your lending practices are flawed, why pay for management that is not managing?

One way to change attitudes would be by implementing 25% pay cuts for six months on bank managers in the event the OCC audit division writes up procedural recommendations that were not already part of existing management plans.

Do you really want an auditor telling you how to run your business? If you don't, then you better make it painful for banking management to let this happen.

Banking as a Cornerstone

If our competitive ability is to improve, then the banking community can be the cornestone. In today's tight credit market, begin incentives for receiving good business plans. Offer lower rates for a businessman who brings in a loan proposal that includes market analysis, competitive trends, organizational team, and such.

With these requirements the banking industry can begin to teach our entrepreneurs how to compete and repay the loans so it can lend them money to grow the business and take advantage of opportunities.

Mr. Samet is the president of Samet & Associates, Macon, Ga., a financial consulting firm.

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