Character

The weight given to a lender's assessment of a borrower's character can vary tremendously between lending institutions and between individual lending officers. Many small businesses have found more success "selling" their reputation and good character to smaller community banks who may be more directly affected by the economic health of the surrounding community.

Trusted traits. The following traits are typically cited as important to a bank's consideration of your character: successful prior business experience, an existing or past relationship with the lender (e.g., prior credit or depositor relationship), referrals by respected community members, references from professionals (accountants, lawyers, business advisors) who have reviewed your proposals, and community involvement. In addition, evidence of a borrower's care and effort in the business planning process suggests that the borrower is committed and confident about the new business proposal.

Skin in the game. One additional factor that many banks consider as evidence of a borrower's "character" is the amount of investment that the owners themselves are committing to the business. Many commercial lenders want the owner to finance between 25 percent to 50 percent of the projected cost of a startup business or new project. A insignificant investment by an owner may suggest a lack of both owner confidence and dedication to the business.

Warning One banker noted to us that he often relies upon reaching a personal "comfort level" with a borrower before making a loan. This comfort level is based upon the degree of trust or confidence that the banker has in the accuracy of the information and documentation being presented to him. He observed that in their zeal to "sell" him on the profitability of their business, small business borrowers sometimes talk him out of this comfort level by disclosing that their tax returns underreport income and overstate expenses. Such disclosures cast doubt upon the credibility of the loan applicant, and impair any sort of trust or confidence between the banker and the prospective borrower.