Character Leads 5 C's of Credit in Small Business Lending

By Allan M. Bookout, First Bank & Trust Company

Young bankers pursuing a career in business lending or credit are taught early in their training about the "5 C's of Credit": character (integrity), capacity (sufficient cash flow to service the obligation), capital (net worth), collateral (assets to secure the debt), and conditions (of the borrower and the overall economy).

While most of the 5 C's involve numbers, ratios or percentages - and it is true more focus is on numbers in business lending today than a generation or two ago - character has not been forgotten. In fact, in small business lending, character is often the most important C.

What does character mean to a bank and for you? While "integrity" is an excellent synonym for character, as it involves truth and honesty which are paramount in banking relationships, let me offer "trust" as another key concept.  

A positive relationship between a bank and a borrower is anchored in mutual trust. From the bank’s side, your banker needs to be able to:

• trust that the financial information you provide is accurate
• trust that the values you place on your assets are realistic, not inflated
• trust that you have disclosed all of your debts
• trust that you are providing all relevant information, not just what is favorable
• trust that you are not hiding negative information
• trust that you will always tell the truth

While trust is essential, so is the tone of interactions between the borrower and the banker. If you try to intimidate your banker, you may sometimes get what you want, but this can be detrimental to a long-term, mutually beneficial relationship. We are expected to respect everyone who walks in our doors. Likewise, respect from customers is appreciated and helpful.

Character, one of the 5 C's of Credit, can lead to exceeding others' expectations and building trust. Just as banks try to exceed their customers’ expectations with every interaction, when business owners exceed their bank’s expectations, good things tend to happen.

Have a question about small business loans for First Bank & Trust Company? Please contact Allan Bookout, Vice President, Commercial Lending Officer, First Bank & Trust Company.

Read more from First Bank & Trust Company on Handshake 2.0.

First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

3 Tips for Preparing a Business Loan Application

From Jim McAlister, Regional Manager, First Bank & Trust Company:

Want to help your banker help you with loan requests? Provide the most current and accurate financial information possible.

Tip #1

Provide a current and detailed personal financial statement. Current means within the last 3-6 months.  Ask your banker to provide an acceptable personal financial statement form that can be saved on your desktop (password protected).  Include an addendum if you need to. Update your PFS at least twice a year. Be sure to have all owners of assets on the PFS to sign and date the statement.

Tip #2

Track your balance sheet and income statement information monthly. Affordable software programs such as QuickBooks are available to do so. Your bookkeeper or CPA partner may also provide an affordable option. The discipline of tracking your numbers monthly demonstrates to your banker that you are on top of the numbers.

Tip #3

Complete your personal and business income tax returns on time. Provide a copy of your tax returns to your banker if the terms of your loan require annual tax return reporting. Many business owners today extend their reporting to October. When you do extend your tax returns, this means your banker is using information that is nearly a year old to make a credit decision. This is why having current interim financial reporting (Tip #2 above) is so important.

These resources on business bank loans from First Bank & Trust Company may also be of interest:

• The Basics of Business Bank Loans (.pdf)
• Business Bank Loan Advice
• Business Loans for Startups
• Applying for a Business Loan
• Need a Bank Loan? Then You Need Skin in the Game
• Bank Loans and Women

Have a question about business loans for First Bank & Trust Company? Please contact From Jim McAlister, Regional Manager, First Bank & Trust Company.

Read more from First Bank & Trust Company on Handshake 2.0.

First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

How Do I Measure the Performance of My Investment Portfolio?

A series of question and answers on banking from client First Bank & Trust Company.

Question:

How do I measure the performance of my investment portfolio?

Answer from George F. Taylor, Senior Vice President and General Counsel, First Bank & Trust Company:

Preparing for tax time always prompts stories about how the Dow Jones or S&P 500 indices performed the preceding year. These are widely recognized benchmarks for how “the market” is doing, but are they appropriate for most investors? 

If you’re invested in mutual funds that don’t match the asset allocation, market capitalization, or geographic concentration of these indices, the comparison may not be helpful.  A few other performance related issues to consider are:

1. Did you add or withdraw funds from your portfolio during the year?
2. Is an asset concentration (e.g., low basis stock that is 10% or more of the portfolio) skewing your results? 
3. Are bonds in the portfolio?

A professional investment advisor can help you make an apples-to-apples comparison and identify some of the biggest factors that impact your performance.

Every year, ask yourself and your investment advisor whether you have the appropriate mix of bonds, stocks and possibly “alternatives” to match your goals and risk tolerance.

Once your asset allocation is set, returns of the portfolio (vs. the benchmark or “the market”) should reflect the risk in your portfolio and be comparable to the risk and return of the benchmark(s).  Asset and sector concentrations relative to the positions of the benchmarks,  low quality securities in your mutual funds, and funds that have succumbed to “style drift” are issues that should be covered as well when discussing performance with your investment advisor. 

Have a question about banking for First Bank & Trust Company? Please contact George F. Taylor, Senior Vice President and General Counsel or Charles (C. J.) Carter, CFA, Assistant Vice President/Portfolio Manager at First Bank and Trust Company.

Read more from First Bank & Trust Company on Handshake 2.0.

First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

Banks Can Help with Estate Planning

From C. J. Carter with First Bank & Trust Company:

Trusts originated in the middle ages when English noblemen went off to fight in the Crusades and left their possessions in the hands of “trustees” who were usually friends or senior officials of the church. Today, bank trust departments manage many different types of assets such as real estate,  businesses, and marketable securities for individuals, families and organizations.

Trusts are legal entities that own the assets placed in the trusts but trust departments can also manage assets that are not held in a trust. Trust departments have a high level of fiduciary responsibility and therefore manage assets in a prudent manner in accordance with the established plan. 

Basic estate planning involves deciding how assets will be managed and distributed in the event an individual is incapacitated or upon that person's death.  For some, a simple will, power of attorney and a living will or medical power of attorney are all that is necessary to manage assets. For others, various types of trusts are also utilized to carry out an estate plan and meet financials goals. A few examples of commonly used trusts are spend thrift trusts which are used to establish restrictions on how heirs can access their inheritance, trusts for minors, and trusts for the benefit of a surviving second spouse with remainder interests vesting with children from the first marriage. 

A financial and estate plan needs to fit a person's unique circumstances.  In order to determine the appropriate plan, an advisor conducts an in-depth interview to identify goals, objectives and risk tolerances. A typical trust officer would be able to provide both financial planning and estate planning services. Other professionals such as financial advisors and estate attorneys also offer these services but a bank trust officer is proficient in both areas. 

If your bank has a trust department, ask to speak with a trust officer about establishing an estate and financial plan.  If you are already working with a financial advisor, ask him or her about creating an estate plan or ask that they refer you to a local estate planning professional. If your bank does not have a trust department or you are not currently working with a financial advisor, ask your banker to recommend a local estate planning and financial professional with whom you could meet. 

Charles (C. J.) Carter, CFA, is Assistant Vice President/Portfolio Manager at First Bank and Trust Company.

Read more from First Bank & Trust Company on Handshake 2.0.

First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

Considering Switching Banks? 13 Questions to Ask

From Kelly Kendrick, Assistant Vice President of First Bank and Trust Company:

When considering switching your account from one bank to another, take these questions to ask the prospective bank:

1. Do you offer both personal and business accounts?
2. What are the fees on the type of account I want?
3. What variety of accounts do you offer?  For example, do you have multiple account options such as money market accounts or certificates of deposit?
4. Do you offer online banking? If so, do you offer online bill pay?
5. Do you offer check cards?  If so, is there any cost for the card?
6. Where are your ATM locations?
7. Is your bank part of a larger ATM network where I could access cash throughout the country and abroad?
8. What is the minimum balance requirement on the account?
9. Do you offer overdraft protection?
10. What is your overdraft fee?
11. If I have the need to frequently visit the bank, where are your branch locations?
12. What are your hours of operation?  Do you have extended drive-thru hours?  Are you open on Saturdays?
13. What other services are available to add on to my account such as remote deposit, mobile banking, payroll processing, the ability to create ACH debit/credit, or credit card processing?

Remember to be specific and to tell the banker exactly what you want out of your account and what functions you need it to have.  The more you share, the better he or she can help you and the happier you will be with your new account.

Read more from First Bank & Trust Company on Handshake 2.0.

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First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

Why It's Good Business to Know a Good Banker

From Kelly Kendrick, Assistant Vice President of First Bank and Trust Company:

In Three Reasons to Build a Relationship with a Banker Now, I shared with you why you may consider developing a relationship with a banker. 

If you still aren’t convinced, here are three more reasons to add a banker to your circle of trusted advisors:

1. Bankers are active and involved in the communities in which they work and live. As a result, they are also well-connected.  They could personally know your “dream client” and may be willing to do a mutual introduction.  By knowing you and your business, they could also be a potential referral source for new customers.
2. Bankers can help you surround yourself with a “dream team” network of professional advisors such as CPAs, attorneys, trust officers, wealth management advisors and other consultants.  These professionals will work together to help you and your business succeed.
3. Bankers keep up to date on the economic environment and regulatory environment.  Your banker may be a wealth of information for questions you may have about the economy or business environment.  With many changes taking place by way of new regulations, your banker can keep you up to date on new regulations, how they affect your bank and how they affect you. 

Regardless of whether you’re in the market for a bank loan or not, most bankers are willing to share advice and to support you as a fellow member of the business community.  A good relationship with a banker can be a huge advantage to you as a business owner and can play an important role in your success.

You're invited to read more from First Bank & Trust Company on Handshake 2.0.

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First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

Need a Bank Loan? Then You Need Skin in the Game

From First Bank & Trust Company:

Diverse sources attribute coining of the phrase "skin in the game" to Warren Buffet, although the New York Times reports he denies first use.  According to Investopedia,  Warren Buffett did use the phrase to refer to a situation in which highly-ranking insiders used their own money to buy stock in the company they were running. Putting money into a project, company or activity shows commitment and is the ultimate vote of confidence.

When applying for a business loan, why do you have to put money in to your company, your investment or your project?  Why can’t the bank just loan 100%? 

Because you should have "skin in the game."

• Not confident or don’t believe in it enough to put your own money in?  Why then should a bank be confident they get back what they put in?
• Risk sharing -  A bank may be more willing to take on a little risk when you share the risk. 
• By putting your own money in, there’s less of a chance you’ll walk away from it.
• When you put money in, this reduces your debt service and allows you to more easily qualify for a loan.  Therefore, less stress is put on the business to turn an immediate profit so it can service the debt load.
• The more money you put into it, the less interest you will pay to the Bank.
• Putting money in will ultimately help your financial situation by adding to your net worth.

If you have "skin in game" when you apply for a business loan, you and your bank can be on the same team.

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First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

You're invited to read more from First Bank & Trust Company on Handshake 2.0.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

Questions to Consider Before Investing in Rental Property

"If I had a way of buying a couple hundred thousand single family homes and had a way of managing them... I would load up on them..."
- Warren Buffett on CNBC, Februrary 27, 2012

From First Bank & Trust Company:

While most real estate investors can't afford a Warren Buffett-like purchase of "a couple hundred thousand single family homes," with home mortgage rates at all-time lows, many who haven't invested in real estate property before are beginning to consider it. 

• Is your local real estate market a good place to rent or sell?
• Who is your target market? Singles? Families? Students? Grad Students? Retirees? Your target market will determine the location in which you choose to search for and purchase real estate.
• Location, Location, Location. Are properties available in a location valued by your target market?
• Where is your competition? Can you choose a better, more competitive location?
• Once you select a property to consider for purchase, what is its condition? Is there any deferred maintenance - such as the roof? What repairs are needed and how much will they cost?
• Are there any environmental issues? What used to be located on or around that property?
• Is the property insurable? Talk with your insurance agent - can you get insurance through your current provider for your target market? If you plan to offer student housing, ask specifically. Some agencies won’t underwrite policies on student housing.
• How much do you have to put down? Typically a bank will require a minimum 20% cash down payment based on either the sales price or appraisal, whichever is lower.
• Do the cash flow numbers work? Make sure you can get enough rent to cover your mortgage payment and take care of operating expenses. Consider and plan for operating expenses such as advertising, cleaning and maintenance, management fees, insurance, legal and professional fees (CPA/attorney work), repairs, taxes, and utilities.
• Can you manage your monthly debt payment after expenses?
• Do you have a plan for vacancy or major non-recurring expenses? It is always a good idea to keep a savings/escrow account to cover 3 months of expenses for your investment.
• Will you hire a property management company or manage it yourself? Are you ready to handle leasing the property, repairs and maintenance calls?
• Are you going to own the property in your personal name or work with your attorney to develop an LLC that will directly own the property for liability purposes?

If we can help you answer these questions or others about investing in rental property, please don't hesitate to contact us, 540-260-9060. 

Of further interest:

Investing in Rental Property: Doing the Numbers
Investing in Rental Property: Getting Ready
Guide to Managing Rental Property in Blacksburg, Virginia

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First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

You're invited to read more from First Bank & Trust Company on Handshake 2.0.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

The Business That We Do Helps the Business That You Do

From First Bank & Trust Company:

If you haven’t already done so, you are probably starting to think about your 2011 taxes.  As a business owner, after year’s end you and your team are working hard to gather all the year’s numbers, close out your books, and ship them off to your accountant or CPA. 

In addition to the records you keep for your business, your CPA will likely request your monthly bank statements.  Ah, yes, those statements you reconcile each month then set aside until tax season. 

Consider the trouble, hassle and time you may save yourself at each year’s end if your monthly bank statements were automatically sent to you and your bookkeeper, accountant or CPA throughout the year. 

First Bank & Trust offers an option within our e-statement delivery system that allows you to add additional email addresses for delivery of your statements.  You can replace your paper statements with e-statements. Signing up for e-statements is a quick and easy process, and can be done through your online banking account.

We're glad to offer business services that help you do business.

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First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

You're invited to read more from First Bank & Trust Company on Handshake 2.0.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.

Consider Your Value

From First Bank & Trust Company:

What sets you apart from your competition in the marketplace?  What is it that you have that no one else can say they have?  Why would your customers or potential customers choose you?  Once you’ve answered these questions, how do you demonstrate this to your customers or potential customers?

At a time when deposit rates are low, loan demand is reduced, and essentially all banks offer the same array of products, it is crucial for a bank to stand out from its competition to increase or maintain market share.  During a team meeting in late 2011, we evaluated the many things we do at First Bank & Trust Company to make banking a unique experience for our customers. 

• We are a safe, sound, secure, successful financial partner.
• We are headquartered in Southwest Virginia and we make local decisions in a timely manner.
• We value customer service; our motto is “customer service comes from the heart.”
• First Bank & Trust Company services the mortgages we originate. 
• Our product offerings include the latest technologies in banking. 
• We understand and value our customers’ time, which is why we go to them so they don’t have to come to us. 
• We bring a consultative, relationship approach to banking.  

After making that list, we were feeling pretty good about the great benefits of banking with First Bank & Trust Company.  But then we asked, "What do we offer that truly sets us apart?"

Simple:  our employees. 

Our employees are unique individuals who bring many talents to the organization and are committed to one common mission: to address the needs of our customers.  Employees at First Bank & Trust Company smile and greet customers when they walk into the branch.  First Bank & Trust Company employees are neighbors and friends.  They’re who you think about when First Bank & Trust Company comes to mind. First Bank & Trust Company employees are the added value you receive when you bank with us.

From hearing about our team meeting, hopefully your wheels are turning and you’ve identified your value.  Maybe you already knew what it was.  What do you offer that sets you apart?

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First Bank & Trust Company, one of the top community banks in the United States, is a diversified financial services firm with office locations in southwest Virginia - serving Blacksburg, Christiansburg and surrounding areas - northeast Tennessee, and the New River Valley and Shenandoah Valley of Virginia. Financial objectives are addressed by offering free checking products for personal and business accounts, and assessing lending solutions managed by mortgage, agricultural and commercial lending divisions. Comprehensive financial solutions are available through trust and brokerage service representatives. For businesses, First Bank & Trust specializes in business services, including online banking and online billpay, and business loans.

You're invited to read more from First Bank & Trust Company on Handshake 2.0.

First Bank & Trust Company is a client of Handshake Media, Incorporated, the parent company of Handshake 2.0.