Personality Counts: Credit Decisions Begin with First Impressions
It happens: Lloyd Droller has seen loan applications come across his desk that reveal what the applicant may have had for breakfast—it’s the coffee stain and blueberry muffin crumbs that tell the tale. And while it seems obvious that most would take extra care with their loan app and financial statements before sending them in, Droller, chief credit officer for Infinity Franchise Finance reminded loan applicants that these documents are like a "first impression on a date." In other words, don't communicate the wrong idea in that introduction, because you'll have a hard time convincing your date you're anything but sloppy.
Droller, along with Jim Hogan, senior VP/credit officer of United Capital Business Lending and Eric Renaud, senior VP/portfolio risk management, of Direct Capital Corp, sat on a panel at the recent Restaurant Finance & Development Conference in November, with the intent to unravel the mystery that is the lender's credit decision.
"We want to bet on the jockey," said Droller. And while first impressions count, so do the second and third. "An operator should be in tune with their stores. He knows where his weaknesses are. He knows what his G&A is—why are food costs higher here?" It's not all about the numbers, he added. "It's about the whole picture; the movement in the financial statement. They (the operator) should be able to tell that story."
Renaud said they ask questions about other expenses running through the P&L. Management should provide full financials with notes. Give more information than you think the credit committee needs. Be thorough.
And credit decisions also are based on whether the owner will provide a personal guarantee: Will they stand behind the store? asked Droller. What happens when the franchisee gets older? Will they want to reinvest?
Hogan added it is also imperative to look at how these operators solve problems and challenges thrown in their path. "There will be innovative ways approaches to minimize the effect the Affordable Care Act, for instance," he said.
As for Renaud, Direct Capital also takes into account the team the operator has assembled around him. No one person has all the skill sets to run a business, he said.