The Milking Stool

Posted on November 14, 2018 Published by

Nearly all the people who read this blog has experienced the excitement and satisfaction of getting a new loan approved. You built a relationship with the client or prospect, analyzed the business and its financial condition, determined the business needs and developed the ideal structure to meet those needs. You even addressed the objections raised by the crotchety old credit officer. High fives all around!

In many cases, loan approval might be the easiest part of closing and funding the new relationship. Now comes the real challenge of documenting the transaction. You know, those pesky things like notes, security agreements, guarantees, subordination agreements, etc. And the larger and more complex the transaction, the larger the list of documents and the greater the probability of extensive negotiations with the client. The ironic part of this exercise is, of course, that you really hope the signed documents go into a physical or digital file to collect dust, never to be seen again (except for the nuisance of loan review!) because the borrower repaid the obligations as agreed. However, since we know hope is not a strategy, appropriate documentation is necessary. But what is appropriate and/or cost effective?

Growing up, I became acquainted with a very familiar and functional piece of equipment: a milking stool. This fine piece of equipment had three legs and was remarkably stable even if one of the legs was not the same length as the other two. Now granted, my experience with this stool had little to do with milking cows, but rather as the piece of furniture I enjoyed while staring into a corner for a “time out.” Even as a child, one could admire the stability of this simple stool.

So, what does my experience in “time out” have to do with loan documentation? Appropriate documentation is like a three-legged stool. One leg is called good, one leg is called fast, and the third leg is called cheap. Pick any two! When working with your client/borrower and legal team, you will typically be able to accomplish any two of the three legs. If you want the documentation to be completed quickly (fast) and accurately (good), you can be sure it will not be inexpensive (cheap). If you want it to be inexpensive (cheap) and accurate (good), count on it taking some time (not fast). And then there’s the least favorite option from a credit officer’s perspective, if it is fast and cheap, you can rest assured that it will not be good.

It is within this framework that constructive discussion can occur with your borrower/client and legal team (including your client’s legal team). Certainly, the size and complexity of the relationship will be the major driver on what level of documentation is necessary, but this simple analogy can provide a reasonable basis to reach an agreement on the level, timing and cost of one of everyone’s least favorite topics: legal expenses.


Richard Rudolph is Senior Consultant at Enlighten Financial, a specialized consulting firm that focuses on loan review and risk management services to community banks and credit unions. Enlighten Financial has made it our business to shed light on the complex financial landscape, and lead clients in the right direction. We work with financial institutions and other providers to mitigate risk. To talk to Rick directly, please call: 920.264.9150.


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