Jeff Judy

Jeff's Thoughts - December 2, 2015

"Good" Borrower Numbers

We're always happy when the numbers our borrowers supply seem to make sense, when they support both the need for an injection of cash and the borrower's ability to repay the credit. Those are "good numbers" in the sense that they support the extension of credit to the borrower.

But are they "good" in the sense that the borrower really has good reasons for presenting those numbers? Are, for instance, their predicted sales increases the result of close examination of their business and their market? Or more an educated guess? Or, not uncommon, more in the nature of a plain old guess?

In other words, if you probed the reasoning behind the numbers the borrower uses to assure you they'll repay, would you find a borrower that had a deep and detailed understanding of financial issues in their business? Or would you uncover a borrower whose business may be working, but who is generally mystified about how that happens?

Think of credit as a way of plugging a financial leak. Now, your borrower may be in a somewhat leaky rowboat, and the need to plug the leaks is definitely real. But not all leaks are created equal.

There could be one fairly large and obvious hole in the boat. Perhaps there is a one-time need or opportunity, such as new equipment or a building expansion that will help the business "float" better than ever in the coming years. That's probably the most straightforward situation, easily understood by borrower and creditor alike.

Or there could be several small leaks, and the borrower really doesn't know where they all are, or how big each one may be. Perhaps a good financial, credit, and business analysis of the borrower shows several areas where things could be tightened up. You can address their immediate cash needs, but also advise them on how to plug some leaks to achieve a sound financial basis for their business. Extension of credit comes along with a healthy dose of borrower education, perhaps about the basic drivers of cash flow.

But then there are the borrowers whose boats are leaking at the seams, as it were, customers whose financial management is casual, if not careless. They could represent higher risk.

The whole point is that when you see the same numbers from all of these types of borrowers, poking around their "boats" and asking some questions could reveal some very different answers. It isn't good enough if the borrower's numbers are accidentally right! You need to have faith in their understanding of how their own finances work before you put your faith in their repayment of your credit.

Basic credit analysis helps you understand the borrower. Really good analysis gives you an understanding of what the borrower understands. And that level of understanding is what you need to be confident that your borrower will have the cash to repay your credit in a timely fashion.