In the world of business lending, we tend to deal with loans that are bit more complex than consumer loans. Instead of having loan decisions that conform to a few basic loan details, e.g. debt-to-income, credit score etc., we need to look deeper into these requests. Particularly, we need to understand a business’s source of revenue well, the nature of their operating expenses, and if the owners have any resources to fall back on in hard times.
This means a request for a business loan will take more time to analyze than a loan request for a car or a home. But, how do you know when you have looked at enough information to approve the request for the business loan?
When a request for a business loan takes an extraordinary amount of time because the analysis is endless, we label the process as “analysis paralysis.” In other words, the analysis is bringing the entire request to a halt. This is generally considered a negative thing, implying that the process has seized-up because someone responsible for the analysis is hung up on something.
For what I label analysis paralysis, I tend to contribute mostly to lack of training or experience on the behalf of managers or analysts. The paralysis usually results because people are struggling to understand the request and don’t know how to look at it in the proper context. The belief is, if facts and all details are scrutinized, then they may be able to tease out minor errors or inconsistencies with how the loan is being presented. But, findings like these are immaterial, so they don’t usually provide meaningful guidance on making a final decision.
Another cause of analysis paralysis is the relentless pursuit of facts. This is a new concept I’ve come to call “check the box” lending, where there is a comprehensive list of documents that must be collected, and the request may hinge more upon the ability to complete the list than what the content of those documents convey.
This may result in an analyst’s desire to have all financial information regarding everything a business owner has done in the past few years. This may include tax returns from businesses that have little or no operations, leases for small amounts of rental space that won’t materially contribute to cash flow, or bank statements that need to verify to the penny what was reported somewhere else. While a good decision can be made without having 100% of the facts, the process will be held up until all insignificant facts are brought to light.
Business lending, more than consumer lending, is an argument that needs to be made. Each request has strengths and weaknesses, but few requests will conform tightly to a model that can be used to regularly approve or deny requests. It is the duty of managers to use experience and reasoning. They need to know when to push forward with a request because the details overwhelmingly support a likely approval, or to slow down the process because more analysis is actually warranted. But if a manager fails to control the process or simply doesn’t know any better, then paralysis may result.