In these days of increased regulations and enhanced due diligence, applying for a bank loan can be dizzying. But five bankers were on hand to demystify the process for nearly 100 people at the Financial Services Commission’s Money Matters Lunch and Learn event last week.
The Feb. 25 panel discussion, which was live-streamed, touched on commercial and personal loans, though a show of hands revealed that most attendees were more interested in the latter.
Throughout the event, panelists stressed the importance of preparing before walking into a bank. According to moderator Colin O’Neal, CEO of JOMA Properties, this process should include doing an honest
self-assessment.
Darren Vanterpool of Banco Popular admitted that most applicants he sees “have not identified whether they have the resources to repay the loan.”
Banks need to have confidence in their clients, which means meeting a checklist of requirements.
Many applicants apply for loans but pay too little attention to how they intend to pay them back, Mr. Vanterpool said.
“The saying that a building will pay for itself has gone out of the door,” he said. “A lot of it has to be identifying what you can afford before you come to the bank. That means you speak to the bank before you go
to the contractor.”
Mr. O’Neal explained that due diligence “is performed on the bank’s part to mitigate their risk.”
In some cases of high risk, banks may offer a shorter-term loan with a higher down payment.
Irvin Meade of the National Bank of the Virgin Islands explained the example of an 85-year-old applicant with no succession plan in place.
“You can get a loan,” he said, “but they will be asking,‘What if he dies? What if the venture does not work? Who would be able to pay for it?’”
‘Five C’s’
According to Marvin Scott of Scotiabank, when evaluating an application for any loan, banks consider what he called “the five C’s:” character, capacity, capital, conditions and compliance.
Nowadays, he said, “The buzzword is compliance. We have to use enhanced due diligence in some cases. We have to satisfy the regulators.”
On the commercial side, this can include a long checklist of requirements, including business credentials, employment, invoices for equipment, and a business plan.
Applicants, even if they’re starting a new business, should keep their full-time jobs, Mr. Vanterpool advised.
“Nowadays, banks’ fallback position for small business startups is generally your primary mode of employment,” he said. But they should also demonstrate a profitable business with good accounting records, he added.
“This is the most crucial part of it,” Mr. Vanterpool said. “Get your business off the ground; ensure that it is running profitably.”
Sasha Creque of VP Bank warned not to rely on hearsay when learning about loans.
“Just pick up the phone and call [the bank],” she said, and recommended a website called Dr. Calculator, which features mortgage and savings calculators.
Debt service
For most banks, Mr. Meade said, the debt service requirement — i.e. the loan payment —shouldn’t exceed 40 percent of the applicant’s total income, though for commercial loans it can be higher.
“If, in your personal calculation, your debt service ratio is 60 percent, it doesn’t make sense to come to the bank,” Mr. Meade said.
“Don’t bother to come to your politician. … You can’t get a loan.”
Mr. Vanterpool added that such requirements mean potential borrowers must exercise patience as they wait for their application to proceed, and come with all necessary information in hand in order to speed things up.
“We don’t start our clock ticking until we get everything,” he said. Once the loan application process has started, banks may require follow-up documents.
“The challenge is that the financing has to be good not just for you: It has to be good for the bank and the regulators,” he said. “This is why we have so many checkboxes nowadays.”