Hello and welcome my name is Lea Klingert I am the CEO of the Alaska Commercial Fishing
and Agriculture Bank or CFAB, prior to my becoming CEO I spent over 20 years in the credit department
of CFAB as well as other banks following we are going to go over some of the common concerns and
questions that a lender may have when considering your loan request it is important to keep in mind
that these are general in nature and the exact information required will vary from lender to
lender What information does the lender need from you to review your loan request and why do they
need so much paperwork Good questions it does seem like a lot of paperwork but it is all necessary
your lender is not involved in your day-to-day operation so we use all that paperwork to help us
determine if you are creditworthy lenders deal in paper and information they look at your financials
profit and loss statements tax returns credit reports and other information gathered from a
variety of sources all of that information helps them evaluate your repayment ability and whether
or not alone is within their acceptable level of risk some of the basic information we need
includes How much money do you want to borrow? What will the money be used for? How will it
be repaid and what is your backup plan? this along with your financial information is a good place to
start there are many types of loans that lenders may what we are discussing today are commercial
loans or loans where the money borrowed is used in your business we will focus on loans for
commercial fishing and yes commercial fishing is a business the criteria used for commercial loans is
different than what is used for a consumer loan think car or house commercial loans tend to be
higher and risk so the requirements will be more stringent there are two basic types of commercial
lenders cashflow lenders and asset-based lenders cash flow refers to your income or earn a cash
flow lender will base most of their decision on your cash flow while they will still require
collateral the emphasis will be on your cash flow an asset-based lender will look at the value of
the collateral or the asset that will secure the loan and then look to your cash flow but the bulk
of their decision will be based on the value of the collateral now that we understand the types
of loans let's talk about the 5 c's of credit the first C refers to capacity to me this is the
second most critical C it measures your ability to repay the loan can you afford the payment lenders
are lending other people's money and because of this lenders will make their decision based on
their comfort with the overall risk of the loan lenders don't do you a favor when they make you a
loan that you cannot afford your lender will look at your earnings history and then review the loan
request to determine the impact the loan will have on your cash flow for example if you are buying
another permit or some I of q's your income should increase on the other hand it is harder for your
lender to measure what impact a faster or larger boat they have on your cash flow in order for your
lender to determine if you can afford the loan they will look at all of your income and all of
your debts including living expenses and taxes we get this information from your credit report loan
application tax returns and processor statements if you have not run your own fishing operation
before or you do not have other sources of income it will be hard for you to show repayment ability
from your history in these cases your lender may require a cosigner to sign on your loan whether or
not you are a highliner or the number one producer for your processor will not matter if the cost of
your operation leaves you with very little income at the end of the season I have seen numerous
operations where the crew took home more than captain when looking at cash flow the focus is
on what you keep not what you make catching the fish is only the beginning managing your income
wisely is also important ninety percent of all businesses fail due to poor financial management
so we covered capacity now let's talk about collateral generally the asset being purchased
will be the collateral most lenders lend up to 70-80% of the collateral value emphasis being on
collateral value the value the lender gives the collateral may differ from the market value or
the purchase price depending on whether you are in a sellers or buyers market will affect how
the lender values the collateral the lenders values are generally more conservative it is
possible the price you are willing to pay for the asset will be higher than the lenders valuation
so let's assume the market and collateral value are the same using a purchase price of a hundred
thousand your down payment would be roughly twenty to thirty thousand dollars some lenders will let
you substitute additional collateral like a boat for a down payment if you don't have the cash many
borrowers have commented that lenders want too much collateral collateral can be an emotional
issue for borrowers and it might help to know that lenders take collateral for a variety of
reasons they look at it as a source of repayment should you default they look at it as a sign of
commitment to the loan they also look at it as a way to lower their risk lenders are not boat or
permit brokers and taking back the collateral is not their goal they would rather have the
loan repaid we have talked about capacity and collateral now let's discuss capital while your
income is your primary source of repayment capital is what you need if you don't have the income it's
your savings your investments and other assets that you own that provide you options when the
season doesn't go as planned it's your backup plan more than just your backup plan having the cash or
resources needed to get and keep your operation up and running is vital to your success lenders
like to know that you have options and that you have planned well now let's look at the
fourth C conditions you may not have much control over conditions but you should be aware of them
remember lenders deal in information we look at industry conditions like market, price, and
competition ask yourself is it really a good time for me to make this investment Warren Buffett once
said be fearful when others are greedy and greedy only when others are fearful have you planned for
this investment have you saved your money pay down your debt the down cycle can be the best time to
invest and if you have prepared it can make you a lower risk to your lender this brings us to the
fifth C, character this is the most important see but it is also the hardest for a lender to
assess especially on a new borrower everyone has a friend or a family member they would not
hesitate to lend money to and perhaps one they wouldn't feel comfortable lending money to my
guess is that the major difference between the two is your assessment of their character so how
does your lender says your character they look at your history today more than ever there are many
sources of information to help us do this one of those is your credit report this tells your lender
how you have handled other debts or obligations before you apply for a loan you should review your
credit report I've SAT across from many borrowers over the years who are totally caught off guard by
the things in credit report your loan application should contain an explanation of any derogatory
information in yours other things we use to evaluate character or whether or not you are
behind on your taxes or your child support do you have a criminal record have you gotten a DUI any
fishing violations how have you managed your money did you plan and prepare for this purchase or have
you been spending your money on toys think brand new trucks snow machines vacation or your credit
card balances high all of the choices you have made in the past will be reviewed generally one or
two poor choices are not an issue but a collection of them may be difficult to explain character is
the difference between working through a difficult situation or not for me character is the most
important C commercial fishing is cyclical and most fishermen will have one or more bad years
during their career it is your character that you and your lender will rely on to get through these
times I have seen many borrowers over the years who have encountered several setbacks some because
of their choices and some due to circumstances beyond their control in the end it was their
character that got them through what does your history say about you if your loan request is
declined make sure you understand why if you know why then you can work at overcoming those
areas and reapply lenders are in the business of lending money we want to lend money that is how
we make a living but it has to make sense and the level of risk must be acceptable to your
lender and for that matter you what that level is will vary from lender to lender lending is
an art not a science before we conclude there is one more C we need to mention communication
before you apply talk to your lender get their advice and once you have the lung communicate
your lender is a valuable resource be in touch on a routine basis and if the season isn't going
well let them know sooner rather than later we hope this podcast has been helpful to you
so that you may have a better understanding of the commercial loan process good luck to
you. Thank you