Jeff Judy

Jeff's Thoughts - April 20, 2016

Two Things I Want My Borrowers to Know

We learn a lot about our borrowers through the process of credit analysis, and I have always been an advocate of sharing those insights with our customers. While that certainly fits under the category of serving our customers, it isn't a purely altruistic suggestion.

After all, the better informed borrowers are about how their finances work, the better we are able to engage them in conversations about improving their financial health. We are also in a better position to discuss a wider range of products and services.

The smart borrower is good for both sides. A smarter borrower is more likely to be a reasonable risk, from a credit standpoint, at the same time they offer us a wider range of opportunities to build a more profitable relationship.

But where do you start? Credit analysis can produce a ton of information, on the one hand, and both you and your borrower are busy, on the other. Are there a couple of fundamentals that make a good starting point?

I believe there are. Before we get into the detailed results of our analysis, the precise numbers and their meaning, I think it is helpful to get borrowers to understand two key concepts.

The first one is the cause of the borrower's need for additional funds. Ask a borrower why they need money and I'll bet you the answer will be the purpose of the credit, how the funds will be applied. The two are not the same, something even credit staff forget from time to time.

Your borrower is probably very focused on the purpose, as in, "We plan to buy a new, more efficient piece of equipment." That may be a good idea, but it does not explain why they do not have the cash on hand to do it.

Explaining the difference between cause and purpose opens the door to the borrower's better understanding of their own financial data. One product of this little bit of borrower education is that it makes them "cash aware", so they understand that their borrowing cause always comes back to a cash shortfall. That provides a context for much more fruitful (and efficient) conversations with the customer.

The other concept I would want my borrowers to understand is that cash flow is something that can be managed. Before you start making suggestions about specific actions, make sure your borrower believes that they can deliberately impact their cash flow. Cash flow is not a product of clever number crunching. It is the product of management decisions.

Once you have a borrower who embraces these credit basics, you're ready for the more detailed conversation about their finances and their needs. And you are ready to work toward a sound and profitable relationship that will benefit both parties.