Matching a client's loan request to the right source of capital in today's business environment is more challenging as banks focus on maintaining satisfactory performing loan portfolios and complying to underwriting standards imposed by Bank Regulators. Not too long ago an established company could go to the local bank, request a loan and be met with enthusiasm and encouragement. It was possible for a business firm to request a loan on Monday and receive the funds the following day. the transaction would often be negotiated and confirmed with a handshake. Banks knew their customers not only by the size of their banking accounts but by the character of the principals in the business. They had confidence in the community's economy and were well informed about their customers business as well as the status of their industry. It was also a time when local businesses had confidence that the bank would be supportive of their needs.

I am reminded of an incident that occurred when a valued customer of a regional bank was seeking a sizable loan to build a restaurant. This customer was involved in a number of business enterprises, highly regarded by the bank and well known to local credit administrators. The individual had been planning the restaurant for several months and was joined by several other local businessmen in developing plans for a trendy place. Only a few weeks prior, the bank's senior credit administrator had entertained the customer in a round of golf at the local country club. A relationship had been established with a senior member of the bank that led to an approval of a two million dollar loan for the construction of the building and the purchase of restaurant equipment.

What made the transaction memorable for the banker was that the loan request was made over the telephone. That loan request was similarly approved within hours after the request was made. Be assured that the bank had pertinent financial information on all the related parties involved and was kept informed by the customer about the plans for the new restaurant. While there may be similar situations today, the process for approving a comparable transaction will not be as informal.

Understanding the banking environment and the changes in the industry is essential if business firms are to be successful in getting the capital they need. The access to capital has been reduced not by the liquidity of banks but rather by the changing underwriting requirements that banks now must put the loan request through. The need for small businesses to obtain capital has never been as great as it is today - and neither has it been as challenging. The days when a banker committed to a loan over a hand shake are gone.

In recommending a bank to a client seeking credit accommodations, several factors should be considered in assisting the client's loan request. They include knowing the financial and operating condition of the bank. Is it under regulatory directives and if it is, to what degree? For example, is the bank operating under a Memorandum of Understanding or the more serious Cease and Desist Order.

Operating under regulatory or administrative directives impact the ability of a bank to support services that are included in the directives. They may impact the availability of capital and thus reduce the access of loans available to businesses. A bank under a Memorandum of Understanding may be required to restrict certain loan activities until the specific administrative directive is corrected. These directives may include demands that direct a bank to revise, amend or implement loan policies or procedures. In more extreme cases, there are directives that address a bank's management. They may vary in severity but in most instances will adversely impact the ability to service their customers effectively.

A Cease and Desist Order is even more serious and usually includes a demand for corrective action that will prevent the bank from engaging in activities addressed in the order. In both administrative actions issued by regulators, the consequences to the borrower will be felt through the reduced availability of loan funds. It is important for both the borrower and the CPA to know if the particular bank is in a position to assist the business by extending the capital needed and able to establish an effective working relationship. If the banker is unable or unwilling to reveal the bank's condition, refer to the market makers for the bank and request the bank's annual 10-K report.

Additionally, bank analysts prepare quarterly ratings on area banks that report on such issues as compliance to regulatory capital requirements, liquidity of the bank, percent of non-performing loans and profitability. Other issues that determine the availability of capital include the concentration of bank loans in specific industries. If a Bank's loan portfolio is heavily concentrated in one industry, it may be under a management or regulatory directive to reduce the loan concentration. Analysis of the performance of the bank's loan portfolio may also indicate other problems affecting loan decisions. Examining the capital of regulated institutions determines the maximum dollar amount of loans that can be accommodated. That is, the dollar amount that a loan or loans, aggregated with all direct and indirect loans to a customer is determined by the capital of the bank. For example, a federal chartered bank may loan up to fifteen percent of its capital to an unsecured borrower or twenty-five percent to a secured borrower.

Accessing capital for the client is a challenge that requires a thorough understanding of the lending market place. Specific issues that should be addressed include determining loan policies of a bank and reviewing the bank's liquidity. This investigation may lead to questions regarding the conservative or aggressive orientation of the lending bank. A key ratio to analyze is the loans to deposit ratio because it determines the liquidity of the bank. As a rule, a higher ratio of loans to deposits indicates an aggressive lending policy. This ratio may also be an indicator that the bank could be reducing loan activities if the ratio is too high. Arguably, an acceptable liquidity ratio for community banks is in the 70% to 75% range. Banks reporting ratios of 60% to 70% may indicate a cautious commitment to extending loans or difficulties in finding loans that qualify for approval. Banks with ratios of less than 50% indicate very conservative lending policies and possible earning problems, although many banks are reporting record earnings while maintaining low liquidity ratios. Additionally, a careful review of a bank's compliance to capital adequacy will indicate if the bank is experiencing other problems that impact its ability to make loans.

As a result of the recent recession and the collapse of the Savings and Loan Industry, along with more intrusive supervision from regulators, banks have implemented stricter underwriting requirements for loans. small businesses that previously were extended revolving lines of credit supported by advances from inventories may now find that inventory advances are non existent. Also, the practice of "streamlined" accounts receivable lines of credit have been replaced with asset based lending policies and procedures that require greater detail and administration from both the borrower and the lender. The result for small businesses is a reduction of available capital from banks, along with a higher borrowing cost to the borrower. The reduction in capital is illustrated by reviewing the advance rates a bank allows against eligible accounts receivable, that is, accounts that meet the limitations established for the number of days an account receivable remains uncollected. With many banks, maximum advance rates have been reduced from 80% advances on eligible accounts receivable to 70% to 75% and eliminating advances on inventory.

An aspect that should not be overlooked is whether the loan request is reviewed by an off-site bank loan committee or processed through centralized loan centers that rely on credit scoring criteria. Reviewing the bank's loan approval process will determine if the bank will reply promptly to loan requests and a reliable source of capital.

In negotiating for a loan with a community bank it is essential to investigate the status of a bank as it relates to its ability to meet the clients needs and the ability to work with the business firm if the company encounters a downturn. Small businesses seeking more generous accommodations on lines of credit from accounts receivable may seek non-regulated lenders who are filling the void created by banks. These non-regulated lenders may allow higher advances on accounts receivable and inventories. The accommodations, however, may result in higher interest rate costs for the borrower.

In summary, the task of the CPA is to ascertain the bank's operating status. That includes not only determining its lending policies and practices but whether or not it is under any banking constraints. A CPA who is knowledgeable about the condition of the prospective lending institution is in a position to render an invaluable service to the client.