Rethink the Loan Presentation: The business model approach to understanding lending opportunities

It is 9:00 am on Wednesday morning and I am sitting in a loan committee meeting with one of our clients.

On the docket today is a 2 million dollar commercial and industrial (C&I) line of credit to a spice company. I read the presentation the night before so I had already drawn my conclusions. Personally, I thought it was an acceptable credit but I had a couple of questions.

What was interesting about this particular committee meeting was the lack of questions or the type of questions for that matter that were being asked by the members. Typically, when there is a commercial real estate (CRE) credit up for approval the discussions are lively and the questions are thoughtful. This is reflective of the comfort level the members of the loan committee have with CRE.

In contrast, with this C&I credit there were few questions and the questions that were posed were either obstructive or not pertinent to this stage of the approval process. For example, a question was asked, “will the owner have his wife sign as a guarantor?”  Although I agree that there aren’t any dumb questions, I do believe some questions are more effective.  I wondered, “Why are they asking about the company’s suppliers or their customer concentrations”. Needless to say, the loan wasn’t approved; not because it was a risky credit there wasn’t a clear framework for merits of the credit to be communicated.

The Solution

I’d recently read a book called “The Business Model Generation” by Alex Osterwalder.  In his book written Osterwalder explains how anyone can systemically understand any venture by analyzing the underlying business model.  The Business Model Canvas (BMC) methodology is used by successful ventures worldwide. Companies like GE, Mastercard, Adobe, 3M, and Intel have used the BMC to discover and change the way they think about their businesses value propositions.

After reading the book, I wondered, “What if we applied the BMC to the loan presentations?” I quickly gave the loan officer a call and asked if he could be to discuss how we could represent the Spice Company loan differently at the next committee meeting.

(RE) Think The Process  

I met with the originating loan officer the next week and we revised the loan presentation using the business model approach. We presented the loan again  and explained the loan opportunity using the components of the business model framework show below.

The Customer Segments– Defines the different groups of people or organizations an enterprise aims to reach and serve

The Value Proposition – The Value Proposition is the reason why customers turn to one company over another. It solves a customer problem or satisfi es a customer need. Each Value Proposition consists of a selected bundle of products and/or services that caters to the requirements of a specific Customer Segment

Channels– The Channels Building Block describes how a company communicates with and reaches its Customer Segments to deliver a Value Proposition

Key Resources– The Key Resources Building Block describes the most important assets required to make a business model work

Key Activities – The key activities building block describes the most important things a company must do to make its business model work.

Revenue and Cost Structure– this is the area most loan presentations emphasize thru analyzes of key ratios and trend analysis. However, without the context of the block described above your end up with a story without characters.

The Approval

During the next loan committee, the loan officer went through the loan presentation using each building block to explain the company’s business and how they will use the requested line of credit. This time there were questions about key suppliers, competitors, and customer relationships. And because the loan officer had gone through the business model framework, he was able to anticipate their questions and he was ready. All the improvements combined gave the loan committee the confidence to approve the loan

Conclusion

Don’t pass up good opportunities simply because you are not asking the right questions. Gain the confidence needed by using the business model framework.

Ancin Cooley

Ancin Cooley

Ancin Cooley, CIA, CISA, is the Founder and Principal of Synergy Credit Union Consulting, Inc. Synergy provides a range of risk management services to financial institutions, which include loan reviews, ... Web: www.synbc.com Details