Prequalify Your Business Banking Prospects In 5 Easy Steps!

If you are not properly prequalifying your prospects, you are wasting a lot of time and resources on deals that aren’t going to go anywhere! Before you know it, it will be quarter end and you still have not hit your production goals!  How do you change this? You need to implement a disciplined and proven approach to prequalifying your prospects! If you do this consistently, you will only invest time and resources on prospects that have a very high probability of getting across the finish line.  This will free up more time to add even more qualified prospects to your pipeline…before you know it, you will be performing like a Business Banking Superstar!  Below are 5 easy-to-implement steps used by top-performing business bankers and commercial brokers to prequalify their prospects.

Step 1: Talk To Your Credit Team!

Schedule a meeting with your credit team and ask them to help you understand the basics of credit policy, product parameters, collateral requirements, borrower requirements, and financial reporting requirements.  This is one of the fastest ways to start building credibility with your credit team! The basics of credit policy will help you understand the industries you should stay away from, unacceptable collateral, and all the other things your credit team would love for you to do upfront! Learn the parameters of the products & services you are offering in the marketplace (e.g. max loan amount, max LTV or required collateral). Learn how to put together a complete loan application package.  Memorize the minimum prequalifying questions your credit team wants you to ask every prospect.  This exercise will help you accomplish 4 very important things: (1) build credibility with your credit team, (2) boost your confidence level, (3) help you quickly prequalify your prospects and (4) only feed qualified prospects into your pipeline!

Step 2: Establish Borrower Fit!

You will use the information you learned in Step 1 to determine if your prospect fits the profile of the type of business your credit team likes! You can quickly establish borrower fit by asking questions based on the feedback you got from your credit team. The typical questions you should be asking to establish borrower fit are:

1. What industry are you in? Your credit team has a list of industries they like and dislike! Stay away from the industries they dislike!
2. How long have you been in business? You want to pursue prospects that have been around for a least 3 years or more. Most businesses fail within the first 3 years!
3. What is your revenue and is the business profitable? Most banks limit your prospecting based on the size of the business. If your target market is businesses with revenue of $15 million or less, you don’t want to go chasing a $50 million prospect! Revenue size will also help you establish product fit in Step 3! If the business is not profitable, you want to ask more probing questions. If it had a one-time loss, there might still be chance to help them. If the business has had two or more consecutive years of losses, it may not be a good fit!
4. Is there any adverse business or personal credit history? If there are felonies, bankruptcies, foreclosures, liens, or lawsuits, you should STOP and ask more specific questions about the adverse credit event. If your prospect is willing to give you information about the adverse credit event, you should talk with your credit team before you do anything else. Otherwise, you will likely be wasting time and resources on a prospect that is dead-on-arrival!

Step 3: Establish Product Fit!

Use the information from Step 1 to determine if you can fulfill the prospect’s credit request. You can quickly establish product fit by asking a few key questions as follows:

1. What is the purpose of the credit request? Don’t ask what type of loan they want. Instead, you want to understand exactly what it is that the prospect wants to finance. Once you know the purpose of the credit request, you can match it up to the correct credit product. I’ve had prospects ask for a business line of credit and, after asking a few more questions, they’ve told me that they want to use the line of credit to finance a partner buy-out. The right product for a partner buy-out is a SBA 7(a) loan.  
2. What is the amount of the request? The amount of the request will help you ballpark whether the business can support the amount being requested. For example: if a business with $5 million in revenue (info you got from Step 2 above) wants a $4 million line of credit, it likely will not fly. Your credit team (from Step 1 above) can tell you the rule of thumb they use to determine how much of a line of credit the business will support. If you use 10% to 20% of revenue, you will be able to quickly establish product fit. 20% of $5 million is $1 million. Your prospect’s business is more likely to support a $1 million line of credit than a $4 million line of credit. The amount of the credit request will also help you determine if can meet minimum or maximum loan requirements for certain business credit products.

Step 4: Establish Collateral Support!

The information from Step 3 will help you determine what type of collateral will be required. Collateral requirement is driven by loan type. You can also use information from Step 1 to help you establish collateral support. Below are 3 main categories of collateral:

1. Commercial Real Estate Loans: you need to ask what type of property is being offered as collateral. Is it owner-occupied or is it investor? The loan-to-value requirements for owner-occupied vs investor are different. If your prospect wants to refinance an owner-occupied property with an estimated market value of $2 million and an existing loan of $1.9 million, you want to stop and ask more questions. If your prospect wants to refinance an investor property with a loan-to-value of 80%, you want to stop and ask more questions. If your prospect wants to refinance a property that your credit team told you they DON’T LIKE, you should probably pass on the deal. You need to make sure that the collateral is acceptable and that you can meet the max LTV requirement!
2. Business Lines of Credit: the collateral for a business line of credit is accounts receivable and inventory. A good rule of thumb to establish collateral support for a LOC is to take 80% of accounts receivable and 50% of inventory. If your prospect wants a $1 million LOC, you need to ask what their current accounts receivable balance is and what the current inventory balance is. If the prospects tells you that they have $800K of accounts receivable and $650K of inventory, the math is as follows: 80% of $800k + 50% of $650K = $965K! Although $965K is less than $1 million, you are in the ballpark and should proceed with the deal! If it were $500K, you will likely not get the $1M LOC approved!
3. Equipment Loans: you need to ask what type of equipment is being purchased and whether it is new or used. There are certain equipment categories your credit team might not like! This information will help you determine if you can fulfill the credit request. If your prospect is asking for 100% financing on a used piece of equipment, you need to stop and consult your equipment financing specialist!

Step 5: Establish Debt Service Coverage Support!

If you’ve gotten positive responses for Steps 1-4, you should proceed to collect a business loan application package. Establishing DSC support requires that you have a loan application package, that you know how to navigate financial statements, and that you know some basic financial analysis. The process for establishing DSC support depends on the loan amount and where you work. Larger loans have a higher DSC hurdle to clear than smaller loans. For example, your bank might use Fixed Charge Coverage on a $7 million loan and Global DSC on a $750K loan. Some banks use Global DSC and some don’t. If you use Global DSC, you are more likely to hit the minimum DSC requirement. If you want a crash course on estimating DSC, check out the free Commercial Lending Toolkit at www.bizpetrol.com. It contains a lesson on how to quickly estimate DSC.

If you are able to get through the 5 steps without pulling the plug on your deal, it means that you likely have a very viable deal! At this point, you will have enough information to approach your credit team and determine whether they will give you the green light to keep moving forward. If you can’t secure the thumbs up from your credit team, you need to either cut your prospect loose or address any concerns the credit team might have about the deal. If you use this 5-step process, you will get more deals approved and have more time to focus on business development and keep your pipeline filled! 

Good luck out there!

Bizpetrol has information, insight and tools that will help you become a Business Banking Rockstar!  You can start elevating your business credit skills using the free Commercial Lending Toolkit at www.bizpetrol.com. You can see all the Business Banking articles (like this one) at www.bizpetrol.com/blog. You can access a series of how-to business banker guides at https://www.bizpetrol.com/Downloads-Free.

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