I truly enjoyed my job as a business banker. I relished the opportunity to meet new people and look for ways to grow their company while simplifying their financial life.
However, I vividly recall one aspect of my job that I didn’t enjoy: when I was underwriting a new loan and the credit team would ask me all these important, relevant questions about my client…that I couldn’t answer. I'd have to write down underwriting’s questions and then go back to my client to get their responses. It was no-doubt obvious to the customer that I hadn’t been smart enough to ask these questions initially—someone else had to tell me to get these important details. If only I'd had Vertical IQ, I could have saved myself embarrassment and the customer time by asking these questions up front when we had our first discussions about the loan.
Industry knowledge for your credit due diligence
If you have ever experienced a similar situation, this blog post is for you! Here are seven practical ways that Vertical IQ can be used by credit officers and relationship managers alike during the underwriting and analysis process.
- Understand working capital as a repayment source. If you are considering a credit, begin by taking the "Working Capital Quick Tour" on the Vertical IQ Industry Dashboard. Since cash is likely your client’s repayment source, you want to be familiar with any statistics or trends that could disrupt cash flow. Then take a deeper dive into the "Working Capital" chapter of the Industry Profile to view more detailed information, as well as cash management challenges.
- Know exactly what the bank is financing. The "Capital Financing" chapter will familiarize you with typical start-up costs and the equipment and technology needed to outfit a business within your client’s industry. This chapter also provides a cost range and useful life for equipment being purchased. You don't want to amortize a loan longer than the lifespan of the collateral.
- Understand the inherent risks. The “Risks to Watch Out For” is an especially important chapter to review while underwriting a credit. It will tell you about current risks that have been identified at both the industry level as well as at the company level. Topics you might see discussed include: economic drivers, regulatory changes, pending legislation, changes in the competitive landscape, and staffing shortages, to name a few. This chapter also presents statistics around the potential business failure or merger rate as compared to the national average.
Bonus Tip: Why not be proactive (instead of reactive) and share the "Industry Risks" chapter from the Vertical IQ Industry Profile with the business owner so that they can 1) address these potential concerns from a "good business" perspective, and 2) help you mitigate them in the credit underwriting process?
- Check the forecast. While forecasts are never guaranteed (just ask any TV weatherperson), a well-informed relationship manager should know if their client’s business is operating within an industry that is projected to grow or contract. This is the type of information you will find in the “Industry Forecast and Structure” chapter.
- Remain on top of the trends. The "Quarterly Insight" chapter updates every quarter and informs you of the most important topics, buzz, regulation, pain point, etc. of the day. Also, when looking at the "Industry Trends" chapter, you’ll notice that the headlines don't necessarily change quarterly—you may see something that has been a trend for years or even a decade! However, any risks observed in either of these chapters may prompt a relationship manager to ask the business owner additional questions.
- Compare the borrower’s numbers to the industry. The “Just the Numbers” chapter is an excellent resource to compare a specific company’s performance to that of their industry peers. The data can be filtered by sales size bands: small, medium, or large business. Filtering the population ensures that you are comparing like-sized businesses. Remember when comparing industry data to that of your business owner, various line-items of the financials can be calculated using different methodologies. This could result in variability of the numbers.
- Review the local economy. As a final component of your credit due diligence review, check out “Local Economies” to assess the health of your local business market. This tool will tell you what industries are growing, where new jobs are being created, and how unemployment rates compare to the overall economy. It also evaluates the health of the local real estate market, providing statistics around vacancy rates, housing prices, and building permits.
An informed partner for the credit process
Nicolle Bouffard, our director of client success here at Vertical IQ, hosts training sessions to teach bankers how to use Vertical IQ more effectively. She has a saying that really resonates based on my own experiences as a banker: “Business owners want to be bankable as much as you want to bank them."
What she means by this is that business owners are no fools; they know that you, their banker, are likely sending your deal to a co-approver. But ultimately, that business owner is probably just as eager to get the deal approved and on the books as you are.
When a bank relationship manager knows the hot button industry-specific issues that might come up with credit approvers and can share that insight with their client, the banker is able to help the client better understand the review process and possibly even mitigate some of the red flag issues. From the client’s perspective, this is TRULY valuable and tailored insider knowledge!
To learn more about how you can use the resources available on Vertical IQ, including as part of your credit underwriting tasks, be sure to register for the next training session at your bank!