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Our Subscribers Say...
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Manager of Credit & Collections, ASSA Abloy Americas Division, New Haven, CT
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Fort Worth, Texas
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Banks Seek Additional Information From Business Borrowers
If you loan money to small businesses, you know it can be difficult to get the information you need to make a good credit decision. Many small business owners have little understanding of finance, and have trouble understanding the type of information necessary to get a loan. That's why these two associations developed the Business Credit Information Package.
Business owners - particularly the owners of small businesses - may find the bank credit application process easier when they use a new Business Credit Information Package (BCIP) developed jointly by Robert Morris Associates (now called "Risk Management Association or RMA) and the American Institute of CPAs (AICPA). The BCIP was developed by a task force composed of members of RMA's Accounting Policy Committee and the AICPA's Technical Issues Committee of the Private Companies Practice Section (PCPS).
According to RMA President Joseph W. May, executive vice president, Whitney National Bank (New Orleans), the BCIP is designed to increase business owners' awareness and to help them provide the type of financial and accounting information bankers ask for, and require, when evaluating loan requests.
"By providing this information up front, it will be easier for banks to make loan decisions, and creditworthy business owners will receive the funds they are seeking more quickly," May notes.
"Business owners are often unaware of the type of information lenders require and, as a result, make many trips to the bank - many of them unnecessary - and sometimes end up feeling confused and frustrated."
Something for Everyone
RMA offers this beneficial package to everyone involved in small business lending. "We think it has something for everyone," May says.
- Bankers. The package provides most, if not all the financial information banks need about a company for meaningful analysis.
- Business owners. The package enables business owners to satisfy a banker's information needs without incurring significant costs.
- CPAs. The package specifies a simple, prescribed format and requires fewer footnotes.
Another primary thrust behind the development of the BCIP is the need for more extensive credit information by lenders in order to help them better serve deserving poor credit risks.
More Information, New Information?
The information that borrowers will have to provide for the BCIP has rarely been asked for before. For example, the package asks for the following:
- The borrower's five largest customers and suppliers.
- Credit terms for each creditor and a percentage of sales or credit limit for each.
- Detailed description of the company's product, services, markets, and operational methods.
Small business owners who are accustomed to providing scant information to their bank in order to obtain a loan - prior year tax returns and/or financial statements - may sense an increased burden in terms of additional work required to complete the four-page Business Borrower Questionnaire BCIP. However bankers believe that having this information at the outset will make for speedier loan request processing.
Credit Today's Best Practices
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Five Elements Give Better Information
According to May, the BCIP includes a prescribed form for financial statements, as well as a set of required disclosures for small business borrowers. This allows small business owners to provide compiled financial statements without all the disclosures called for under generally accepted accounting principles (GAAP). The five elements comprising the BCIP are as follows:
Request Letter. This functions as a checklist for the banker to communicate information needs and documents the banker's willingness to accept financial statements in the BCIP format. Commonly requested types of supplemental financial information are itemized on the checklist, and blanks are provided for requesting types of information not otherwise listed.
RMA Business Borrower Questionnaire. This form contains questions about a firm's accounting system and other pertinent facts bankers generally need in a lending situation. It was designed as a supplement to financial statements that are prepared in the BCIP format. Bankers may, of course, request whatever information they desire; this questionnaire is a convenient form for transmitting questions and obtaining answers on accounting and financial issues.
Reporting and Disclosure Checklist. This is a checklist for accountants to use when preparing financial statements in the BCIP format. It lists the various types of financial statements that must be included, the degree of detail required for each, and the footnotes that must accompany the statements. Although this form is a tool for the accountant's use, it gives bankers an overview of what they will receive when financial statements are prepared in the BCIP format.
Prescribed Form for the Preparation of Financial Statements. This form is designed to present two-year comparative figures for the balance sheet, income statement, statement of changes in equity, and statement of cash flows. Eleven footnotes are also required. The statements will not contain all footnotes that are required in a full generally accepted accounting principals (GAAP) presentation, but enough are included to answer most of the questions that arise in the credit analysis process.
Accountants Report. A specific format is recommended for the accountant's report that accompanies financial statements presented in the BCIP. The report cites the BCIP as the format for the presentation and identifies the bank that has agreed to accept statements in this format. It provides that the financial statements, presented in the BCIP format, were compiled in accordance with the AICPA's Statements on Standards for Accounting and Review Services (SSARS No. 3, "Compilation Reports on Financial Statements Included in Certain Prescribed Forms").
In essence, the RMA Business Credit Information Package is a compromise. Like most compromises, it is not a cure-all. It is not a viable approach when circumstances dictate the need for full GAAP disclosures. However, it does offer a reasonable alternative to compilations with no footnotes and is a cost-effective alternative for those situations in which all parties involved can agree to its use. It provides bankers with comprehensive sets of financial statements, presented in a defined format, together with specific disclosures. It is a tool for managing information risk that bankers can employ to their benefit. It may allow accountants to reduce fees for such services. And it enables business owners to satisfy their bankers' information needs without incurring significant costs. In situations where it can be used, everybody wins.
For More Information
The booklet also is available to RMA nonmembers - including small business owners and prospective borrowers. Quantity discounts are available for both RMA members and nonmembers. For more information and to order, contact RMA's Customer Service Department, 1801 Market Street, Suite 300, Philadelphia, PA 19103-1628, 215-446-4000
Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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Outlook 2012
This month's survey explores...
- What the top problems are facing credit execs currently, and
- What the top improvement initiatives are.
Click here to participate!
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February 2012
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