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For most small to medium sized businesses that are owner-managed, the owner’s management ability and character are, of course, the primary focus of a lender’s evaluation in this area. However, there are many other factors that can adversely or positively impact a lender’s assessment. These can include items such as the presence and ability of secondary managers and other key employees, availability of replacement management, availability of management resources, and the complexity of management duties. Collectively, these areas are examined by a lender in order to:

1. Obtain  reasonable  assurance  that  adequate  management  ability is
    already present or is readily available to operate the business;

2. Obtain reasonable assurance that the business is being operated in an
    ethical and legal manner; and

3. Evaluate the willingness of a business’s owner to repay debt and meet
    other obligations.

In assessing management ability, generally a lender will examine a person’s qualifications in certain key areas. Among the factors that could be considered are educational background, industry experience, direct experience with the business being financed, past management history, and experience managing a business of like or similar type. Usually, a lender prefers to see that the owner of a business has a minimum of three to five years of direct experience with the business being financed, ownership and management of a business within the same or similar industry, or substantial management experience with a business within the same or similar industry.

Another method of assessing management ability is through the use of a business credit report and a personal credit report for the business’ owner. These credit reports were discussed in more detail in the Credit/Financial Analysis portion of this discussion. Lenders will usually examine the credit score and look for the presence of any derogatory information on the report including judgments, garnishments, late payments, etc. that can be indicators of management deficiencies. A poor business or personal credit history is usually a clear sign of management’s inability to operate a business in a manner sufficient to make timely payments to creditors.

A lender can also evaluate character through the use of a business credit report and a personal credit report for a business’ owner or for a key employee. Again, these credit reports were discussed in more detail in the Credit/Financial Analysis portion of this discussion. Derogatory information contained on either report, i.e. lawsuits, judgments, etc. can be indicators of unethical or adverse business practices. Additionally, a poor business or personal credit payment history can also be a strong sign of poor character, particularly when a business or individual possesses adequate resources to make timely payments to creditors but does not.

Other methods of character investigations utilized by lenders include background forms or questionnaires, checks of public records, criminal background checks, and the use of private investigators.