The Awful Truth: How Entrepreneurs Hurt Themselves at the Bank
An interview with veteran small-biz banker Charles Green
Meet Charles Green, gatekeeper to entrepreneurs' dreams. For over 10 years,
he has lent more than $200 million in Small Business Administration-backed funds
to young companies. Now, he's a vice-president at San Diego-based Bank of Commerce,
a major SBA lender. (In a typical SBA loan, the government guarantees 75% of principal up to
Green is also the author of the recently published SBA Loan Book (Adams, $12.95), a
218-page guide to the inner workings of the lending game. Business Week's Dennis Berman
recently spoke with Green about how entrepreneurs can avoid hurting themselves at the bank.
Here's an edited transcript of their conversation.
Q: Let's say I am a borrower. How do I change my mentality to look at my loan application
as a lender would?
A: You just don't take anything at face value. You tell me you're incorporated? Well, let
me see your articles of incorporation, and your bylaws, and the stock certificates so I know
who owns this corporation. You showed me some financial statements. O.K., well, let me see your
tax return. Did you tell Uncle Sam the same thing you're telling me? Now we even go a step
further, and ask Uncle Sam whether this is what [you] really told [him.] You're going to tell
me that you have a piece of property that's from one light pole to the next down a certain
street. Well, I want to see a survey. And I'm going to go to the courthouse and see: Do you
really only have that one mortgage on it, or do you have six mortgages on it? You tell me
you always pay your bills on time. Well, what does the credit bureau say about that? Do your
lenders say the same thing? So the toughest news in the lending business is that people lie.
Q: Have you seen deals that progress and then, after a certain point, fall apart because
a fact on which it was all hinging was not true?
A: That will probably be my next book. Yes, we see it all the time. I'm working on one
right now I'm trying to close this week where the seller just, oops, forgot to tell everybody
that he had an extra $90,000 of financing on this property...It's a big mess.
Q: Let's say you do, however, have some blemishes on your record: A failed business or a
credit problem some years back. How do you broach that topic -- if at all -- with a banker?
A: I think the individual has to first come to grips personally with why they did fail.
A lot of times it's not their fault and may be influenced by events beyond their control. But
they ultimately were responsible, and they didn't react correctly or they didn't make good
decisions. I'm much more impressed with somebody who comes to me and says: "Look, I had an
opportunity. I made a big mistake. I handled it all wrong, and I've paid for my sins...I've
made all the creditors good. I paid everybody back. And I learned a lot. Now I'm back, and I
want to try again with this. I'm not going to make the same mistakes because here's what I'm
going to do better." I'll listen to that rather than just a perennial victim.
Q: What's the difference between an SBA loan and a conventional bank loan?
A: The SBA program seeks to provide a credit enhancement to small-business owners and
entrepreneurs. That allows lenders to overcome certain nonfinancial risk that would present
them as a lender to make them a conventional loan. The other thing that many banks have a
hard time doing is making long-term loans. For example, if you buy a piece of property on which
to house your business, you shouldn't have to pay for that in five years because it's a
long-term capital investment that's going to last you 20 or 30 years. With SBA financing,
you're able to amortize that debt over 25 years because the SBA provides a long-term credit
enhancement to that bank, giving it the assurance that -- beyond where we can reasonably measure the
credit risk -- there's going to be some protection to that lender.
Q: There are a lot of businesses that need to close on loans fast. How can you speed up
A: It depends on the motivation of the borrower, the motivation of the lender, and the
standing of the lender with the SBA. There are three grades of lenders for the SBA: the general
program, the certified lenders, and preferred lenders. Preferred lenders have the ability to
get a 24-hour turnaround...There are also more motivated lenders [that are] doing a
larger volume to attain preferred status...How hungry...the lender is determines how fast
they take your information and turn it around. But the borrower is the key. They're going to be
asked to produce a lot of information. And if they're going to sit there and tell me, "I've
got to call my CPA, I've got to call my attorney, and I've got to get my secretary moving"...that
tells me that they're not really that motivated.
Q: In what areas do you think the borrowers are most often unprepared?
A: People buy businesses because they're good at flipping hamburgers, or they're good
with children, or they enjoy operating a hotel. But they haven't stopped to take the time
mechanically to go through the analysis the way a lender will and provide some kind of evidence
of their ability to pay back the loan.
Q: You say in your book that people who may not typically qualify for a loan can get one
of these. Can you go into that a bit more?
A: If I'm an IBM employee who gets downsized...and handed a $70,000 check, I decide that
I want to be a day-care-center operator. The fact that I have three kids and that I've been a
volunteer in my church working with kids for 15 years may not convince a regular bank that
they should take a chance on me. On the other hand, an SBA lender would compensate for that
weakness... I did have good financial equity going into the transaction. I had some good
general business experience in my career with IBM, and I did have a lot of attributes dealing