One of the most disappointing realities among small business lenders is how many clients and prospective clients to do not measure, monitor or often even understand the financial metrics of their own business.
Raise your hand if it ever happened to you: You get well into discussions about promising deal with a prospective client that has an established business, good plan for growth and cash on hand. You ask for the client prospect’s business financial statements and they reach into a desk drawer, handing you three manila envelopes.
These envelopes contain three years of original, signed financial statements that your prospect has never opened or read. Nor realized that the information there would crush any prospects of their getting the loan you were both counting on.
The scale of financial illiteracy among American entrepreneurs is astonishing. What’s the cost? Access to capital, misdirected business strategies and financial theft perpetrated on unsuspecting business owners too ignorant of their own books to realized they’ve been ripped off.
As Jacob Soll opines in the New York Times, the need for greater financial accounting skills among an even broader constituency. “A population well-versed in double-entry accounting will not immediately solve our complex financial problems, but it would allow average citizens to understand the nuts and bolts of finance: balance sheets, mortgage interest, depreciation and long-term risk,” said Soll.
Business lenders need to take such borrower shortcomings seriously. When a business owner doesn’t invest the time to monitor, much less understand, their own financial metrics ahead of business failure, you are financing a train without an engineer.
Soll concludes, “Without a society trained in accountability, one thing is certain: There will be more reckonings to come.”