I once asked the head of a "bank watch" service: What is the first sign that a bank is in trouble? His reply: "When the bank starts lending outside its territory."

Another banker made the same point this way: "If I can't drive to a borrower's facility and be home that night, then I don't want the loan."

Indeed, nothing beats being able to see an operation in person.

It's a good sign when the CEO walks you through the plant and knows people by their first names. When managers know the processes they are showing you and you get a feeling that they have a hands-on role in making their companies successful, this, too, is a plus.

Equally important is the good will a bank generates when its lenders visit a borrower's plant.

I once visited the largest container ship transfer operation on the East Coast. As the CEO took me through, everyone came up to say "hello," many presenting suggestions and complaints - all of which went into his notebook.

In the same way that a good menu and attractive facilities are a strong indication that a restaurant will have good food, the company that looksgood is likely to be a good loan risk.

One banker uses the "clean restroom test" before lending. If the restrooms at the prospective borrower's plant are not clean, he concludes that the company will neglect other details that could make the difference between success and failure.

But being vigilant goes further than the restrooms.

A banker once told of the time he visited a prospect whose paperwork made it look as if the operation's sales were terrific and the loan being requested would be a piece of cake to handle.

The banker then went into the warehouse, approached a stack of products boxed and ready for sale, and reached to touch the top of the highest box on the shelf. His hand came away soiled with dust-enough for him to conclude that those boxes had been sitting there at least a year.

In another instance of stale inventory discovered by a banker, tags on boxes bore a date from the previous year - a far cry from the quick turnover claimed on the loan request.

Character is not what it used to be. Borrowers who never would have considered bankruptcy now operate as if this is a normal business decision.

And regulators are demanding far more documentation in the paperwork for a loan, thus giving the term "character loan" a negative connotation. In the past, it meant "top grade."

Bankers need something else to go by in addition to documents, however. Wandering around a prospective borrower's plant can serve as corroboration or negation of the basic information that face-to-face discussion supplies.

Those with sharp eyes and inquiring minds can quickly determine whether the operation is well-oiled and generating the cash it says it is - or whether it has replaced LIFO (last in, first out) or FIFO (first in, first out) accounting with that dreaded alternative, FISH-first in, still here. Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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