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Screentrade Magazine - Inside the Black Box - The Bank Credit Approval Process

February 28, 2014

You make a finance-raising application for your cinema project and the deal goes through fine... but, ever wondered what happens between you or your broker's input and the bank's final decision? EFA Partners explains the 'black box' of the bank credit approval process. 

Whether you’re looking to borrow to successfully grow your movie theatre business, or are simply refinancing existing debt, all avenues involve a loan-approval process, which can sometimes become a frustrating ordeal. If you’ve already been through this process, then you've probably traced the following steps:

You spent days preparing a detailed presentation that included company highlights, historical financials, projections, and an overview of the Exhibition industry so that the bank can better understand your business and credit profile. Next, you contacted numerous lenders, followed - potentially - by myriad calls and meetings. Some lenders weren’t interested for reasons ranging from ‘your business is too small’, ‘too large’ or ‘we don’t lend to film exhibitors.’ 

However, if you were fortunate and one or more prospective lenders provided you with proposals, you likely selected a lender after hours of arduous comparison. Then it was time to answer more ITAL bank questions, fill out more forms, and supply additional materials. After all of this, it was time to sit and wait for the final verdict on your loan. 

Did you wonder what bank personnel actually did during the approval process, how they made their decision and who became involved? This process can be the most frustrating part, as the decision potentially most crucial to your success may ultimately be decided by people you’ve never even met during the process. For this reason, when applying for credit, it’s particularly important to have at least a basic understanding of the mysterious 'bank approval black box’ if to enhance your likelihood of receiving the loan.

EARLY STAGE PROPOSALS 

You may receive various proposals or term-sheets during the early stages of your process. Some you may receive only a few days after providing lenders with your information, while others may not be seen for weeks. While it may seem encouraging to have a proposal so early in the process, it’s important to understand its source. Has your bank rep. already vetted your company with their credit group, or did he only provide indicative terms that still need to be reviewed by credit personnel? If the latter, then there’s a possibility that the proposed terms are simply what a sales rep. wanted you to hear and may not ultimately be approved.

HOT TIP: Therefore, it’s highly recommended to ask your bank rep. which specific personnel have reviewed proposals to ensure that the terms have a reasonable chance of being approved.

INTERNAL BANK PRESENTATIONS

As banks go through their approval processes, all the info you’ve supplied is usually condensed by your bank rep. into a deal summary for a credit committee presentation. The deal summary template requires certain items to be included before being submitted to the credit group. Hence, you should understand that there’s a good reason for some of the ‘excessive’ questions and material requests you'll receive from your bank rep. and that the rep. needs to ‘check the box’ for his or her summary.

CREDIT COMMITTEE LEVELS 

Banks typically have different internal approval levels that depend upon several criteria such as loan size, company size, company maturity or industry. For smaller loans with well-established companies within industries with which the bank is more readily familiar, the approval process may only involve one credit committee meeting. For other loans falling outside of these criteria, the approval process may include an additional meeting with senior bank management. Loans needing approval at this level often only get one bite at the apple, so a rejected loan likely won’t get a second chance. With this in mind, your bank rep. should be armed with more info to prepare for any potential questions that may arise. 

THE DECISION-MAKER 

Bank approval meetings typically involve personnel from bank sales reps. to senior credit officers. While most people in these meetings have a voice, often there is 'The Guy' who is the ultimate decision-maker on credit matters. This person is usually a senior bank officer, so other bank personnel may be leery of voicing opposing opinions. In short, if this person doesn’t approve the loan terms, then the loan will be rejected or may be further modified under terms that may be unacceptable to you.

HOT TIP: Since it’s possible that this senior person won’t be involved in the loan-approval process until the latter stages, it’s again good to ask your bank rep. which personnel have already reviewed your loan paperwork and which have yet to see it throughout the process.

SUMMARY
It’s critical to have appropriate materials prepared when seeking financing. It’s equally important to approach several banks so that a competitive bidding process may result in your getting the most favorable market terms. During this process, ask detailed questions about the bank’s approval process, which may influence your lender-selection process. After you select a lender, it’s also wise to answer any and all questions that arise during the credit approval process, even if they seem repetitive or unnecessary. Bank personnel understand their internal approval processes and know what may be expected during their meetings. Questions or requests for materials which, on the surface, seem pointless could be strategic for certain aspects or certain people involved in the final approval process.

HOT TIP: Doing everything you can to understand what goes on inside the bank’s ‘black box’ could ultimately have a direct impact upon the bank printing out a sheet that states “Loan Approved”.