Lenders pay attention – how you say “no” to a loan request often says more than how you say “yes”.
In a marketplace, everyone is watching and paying attention all the time. We do not operate in a vacuum. Borrowers, investment bankers and other lenders pay attention to how lenders operate. They are paying attention to how you say “no” as much or more than how you say “yes”. There is definitely an art to how to say “no” to a loan request. In many respects, it is harder to decline a loan request effectively than it is to approve it. And the memory of declined loans can leave as significant of an impact as loan approvals.
Remember that while you signed a mutual confidentiality agreement with the borrower, they are under no obligation to avoid disclosing that they had a bad experience with you to other market participants or the details of how poorly you declined their loan request. They are going to tell others. You can count on that. And since this is usually one of the first and primary impressions of your firm, then most people will conclude that is how you handle all aspects of your lending operations. If you are sloppy, indirect or dishonest, they will assume that is how you also handle your portfolio companies.
First things first, a quick and direct no is always preferable to a slow no. This may seem obvious to everyone, but it is essential and bears repeating. No one likes to have back and forth communication for 3-4 weeks only to be told that the deal is too small or in the wrong industry or geographic location. A good lender should be able to message pretty quickly if the deal is too small or in the wrong industry. The more refined and experienced lenders will have a disciplined internal process that can ferret out big issues that are going to prevent you from getting a loan approval. This will elevate your status and perception in the marketplace. If you don’t like a specific industry, geography, size or structure of transaction, let everyone know right away. This is definitely a best practice. People might not understand your reasoning fully and they may even try to convince you out of your position, but they will respect your honesty and directness and it will help you avoid stringing them along and surprising them later. It will help prevent the devastating and lasting impact of a slow “no” response.
Clarity about your decision-making, underwriting and loan approval process is absolutely critical. The more clarity, the better. Many lenders have an opaque and vague approval process that is difficult to follow. Also, as a professional working for a lender, if you are unsure of your firm’s approval process and you don’t have clarity yourself, this will be obvious to borrowers and prospects. If you can’t explain your approval process in 30-45 seconds or less, then savvy market participants will sniff this out and go elsewhere. They may give you a look and a second chance, but you will not be in their top-tier of go-to lenders. My suggestion would be to spend time cleaning up your internal processes and being certain of how your approval works before going back to the market.
If you have a loan committee, explain it in detail and give the borrower access to as many of those committee members as possible to pitch their loan request. If borrowers are not given access to any of the loan committee members – the true decision-makers – this will put you at a competitive disadvantage to other lenders. If you are not one of the decision-makers, but are more of a front-line business development person, let people know that reality and let them know whether or not they will be given access to the decision-makers and how decisions are actually made. It is unfair and ineffective to not explain your process up-front and walk everyone through your process. If you can effectively and concisely communicate your approval process and stay consistent to it throughout the experience, this is a prime opportunity to differentiate yourself as a lender.
Here are some things to avoid:
Being obviously unprepared for a prospect call or meeting after materials and confidential information has been sent and given time to review that information. Most borrowers and prospects will appreciate your honesty and candor if you postpone or delay a conference call if you haven’t had any time to review any of the deal materials or overview memorandum. Call prep is a seemingly lost art nowadays, despite the fact that we have an endless amount of free information right at our fingertips. At least use Google to look up a couple of key facts before jumping on the phone and embarrassing yourself.
Making vague references like “our guys” or “I sent it to the group” – An example would be, “I showed the deal to our guys and they didn’t like it.” This is a clear signal that you are not a prime decision-maker and that the borrower will not have access to the real decision-makers. Also, it gives no clarity to your process and no indication of what was actually reviewed. Did you actually sit down and discuss the deal? What was reviewed? Who was involved in reviewing? Was an internal memo prepared? Who was speaking on behalf of the borrower? How long did the discussion last – 30 seconds, 5 minutes, 10 minutes?
Referring to a final decision made by a single decision-maker without giving the borrower access to that person – An example would be, “As you know, Mr. or Mrs. X runs our firm and he/she basically outvoted all of us and turned the deal down.” This is an example of a shop that has a credit committee of one and is unreliable for borrowers or prospects that don’t have a formal relationship with that one person. Savvy borrowers and their representatives will quickly conclude that it is pointless to spend time showing you deals and will want to go directly to this top person, because they are clearly the only vote that counts. The reality is that many finance companies and commercial lenders are led by one dominant personality who is really the ultimate deciding vote. This situation can work well and it does work in many instances, but it will quickly become apparent to the marketplace if they can gain real access to that person or not. Everyone will know if you as a deal professional at your firm have a handle on what that person will actually approve or not. And the preferences of that person will come to define who you are as a lender.
Complaining about your own process or expressing confusion about your own process – this is a killer for lending professionals. It sends a clear signal to market participants that you are having internal problems and it is best to stay away. Even if you can get to a loan approval for this prospect, if they are experienced then they will not want to enter into an important, possibly long-term relationship with this lender. A debt capital provider is so critical to a business, most borrowers will want to avoid entering into a relationship with a lender whose representatives are possibly confused or even disgruntled about their own internal processes.
Indicating that a request is “almost” approved without giving any clear details about what that means or how that final step is going to be taken. Be as specific as possible about your approval process and then stick to that process. If something comes up to derail or interrupt that approval process, tell the prospect right away. Don’t wait and try to dance around the topic, this is only going to lead to problems later.
Repeated questions and requests for information about an opportunity, before signing an NDA or over-negotiating and taking a long time to return NDA’s. This one is pretty self-explanatory. If it takes your shop 10 days, 2 attorneys and 13 e-mails to review, mark-up and sign an NDA, it doesn’t exactly send a signal to the marketplace that you are going to be a great lending partner and that you are going to be easy to work with.
Running a finance company, bank division or lending group is not easy. It’s hard. But there are ways to differentiate yourself in a crowded marketplace and there are best practices. Saying no effectively is an art and some do it much better than others. Be honest, direct and do what you say you are going to do. Do your homework, be courteous, quick and polite when saying no. It speaks volumes about your firm.