How to Choose Whom to Lend to?

By Alan Olsen

The world runs on money, and those who have the money typically control how things are run. That’s a very broad and general statement, and of course, there are many variables but for the most part, when money talks people listen. Thus, the role of venture capitalists, banks and pretty much any financial institution is very important in the business world. Most start-up companies are not self-funded, which means at some point they must borrow money are sell a portion of their business in exchange for funding in order to start, save or grow their business. That means those who want to borrow money are constantly approaching banks and other financial institutions for loans.

There Are Risks Involved

Because there is never a shortage of people or organizations asking for loans, lenders have to make a lot of important decisions regarding whom they will lend money to and whom they won’t. For lenders it’s important to make the right decisions because often times millions of dollars are at stake. Not every organization or business that wants to borrow money should be given a loan. Some borrowers are riskier than others, which means the lender must also accept those risks if they choose to give them the loan. Thus, it is imperative to consider each would-be borrower carefully. I recently spoke with Anthony Thompson, the Senior Vice President at United Business Bank, about determining whom his company lends to and asked him how he picks and chooses.

Get to Know the Borrower

Anthony said that if you can get to know the borrower well enough then you can get a pretty good idea as to whether or not they are going to pay you pay back. “In my 14 years of being a banker, character is probably the number one criteria. Because if you have a borrower that you know is going to pay you pack no matter what, it’s pretty easy to lend.” Of course, Anthony noted, that is not easy by any means to get to that point. It takes time to really be able to ascertain a borrower’s character. He said the bank he works for has to look at a person’s or company’s tax returns and finances with several intentions. “We’re looking at people that have some history of making money, have a business that has been profitable for at least three years and that has people that don’t take all the money out of their company and that leave some retained earnings in the business and have an appropriate use for borrowing money.”

Reap the Rewards

Being in the finance and loan business is always risky, but by getting to know those who are asking you for money you can better set yourself up for success. Not everyone who asks for money is going to be able to pay you back, so it’s important to consider the risks and weigh a company’s payback history before giving them a loan. If you choose wisely your bank will reap the rewards.