If you have a business with a five-year-plus record of strong cash flows, a large base of equipment or a building, and a clean credit rating, then you don’t need to know someone like John Phelps.

You are what they call “bankable.”

Phelps runs Rockford Local Development Corp. in Rockford, Illinois. RLDC is a Certified Development Company under the Small Business Administration. There are a little more than 200 of these “gap” lenders in the country. They work with companies or entrepreneurs looking to open or expand who fail one, two or even three of those tests above.

The first two tests are based on numbers, and even though lending institutions vary on how much “risk” they’ll take on when financing a company, they don’t vary too widely.

“If it’s an existing business, you’re going to analyze their financial statements, their returns, you’ll go through a cash-flow analysis,” Phelps says. “What’s their historic ability to generate cash flow from existing operations to support this expansion? If they pass that test, that’s pretty rock solid because the presumption is that the expansion is going to be accretive to earnings, and it’s going to increase cash flow and it will be a stronger company.

“If it’s a new company, or if this is a major expansion where they don’t have historic cash flows, you’re going to look at projections, test them, stress them and try to determine if management has the capacity to pull this off. That’s a grayer area. You’re relying on projections that hopefully come through. Cash flow is the most important issue.

“The second thing is the secondary source of repayment. If you fail, how do we get our money back? Conventional lenders are asset-based. They are lending a certain percentage off the assets they are financing. If they are financing a building, maybe they’ll go to 80 percent or 75 percent. If it’s equipment, it might be 50 to 70 percent. Working capital assets, such as accounts receivable, maybe they’ll go to 80 percent, but not to accounts over 90 days.

“If they are financing inventory, they might go 50 percent against working goods. They aren’t going to do anything on work in process.”

The third test is ever evolving.

“It’s a character test. They’ll pull a credit bureau on you. They’ll make sure you’ve paid your bills, that you haven’t filed bankruptcy and that you don’t have any liens on you. Today, it’s so easy to do background checks. They’ll look at what’s out there on the internet. Have you had any arrests? They’ll do those kinds of things to make sure you’re of sound character.”

Indeed, the tools to use your social media as part of a profile are improving daily. I did a quick search on programs to build a personal profile through social media and found Deepsense by Frrole. I typed in my personal email address in the free trial and it created this personality profile in five seconds:

“Alex is an energetic person who does not care much about the opinions of others. He has a very optimistic attitude and has the ability to see the glass half full rather than half empty. He expects the best to happen even when there are challenges all around. He can be friendly at times but does not hesitate from being critical when the situation so demands. He can be skeptical of what others have to say and can question them incessantly until he gets his answers.

“Alex is a person who might be disorganized at times and does not always have a disciplined approach and can potentially procrastinate hard tasks. He a person who is not rattled easily but is motivated by challenge, competition, accomplishment.

“Alex is somewhat of a skeptical person who could run out patience with lack of achievement or direction. He can be a good team player when the situation so demands. However, it does not come naturally to him. While he can be effective in a leadership role, he can face challenges when he is part of someone else’s team. He likes to finish his tasks on time and would start something now rather than later, given a choice.”

I have to admit, this is pretty spot on.

It also spit out grades on a variety of behavioral attributes, such as:

  • Attitude and Outlook: 7/10 (this is good)
  • Action-orientedness: 7/10
  • General behavior: 5/10 (need to work on this)

And this was the free trial. For a fee, you can enter the social media profiles and learn a lot more.

So the amount of information available is greater ever and continues to increase. Still, Phelps is like many lenders or investors.

“A lot of it still is gut instinct. Lenders tend to be generalists. Our knowledge isn’t real deep. We don’t always understand exactly what they are doing. I am one who bets on the jockey, not the horse.”

The jockey/horse analogy is one you hear or read about all the time.

To Phelps, it means “you look for someone who’s really bright, who refuses to fail, who’s got a drive. Oftentimes, you can read that. You spend enough time with them and you get a sense that they are going to be successful. If not on this project, then on the next one.”

His best example was a startup manufacturer in Rockford, which remains a strong blue-collar town. More than 20 percent of all workers in the Rockford metropolitan area work in manufacturing.

“I had a guy walk in. I was alone in the office. He was a big, intimidating guy and he said ‘I need to see John Phelps.’ I almost lied to him. I almost said ‘he’s busy, he’s not here.’ But then I thought, he’s so big that if he finds out the truth I’m in trouble. So I sat down with him and he told me he’d started his business through a bank. He’d bought his equipment. It was the kind of business where he had to operate two shifts. He hired his people, fully staffed up, and then he says ‘I’m not sure I’m going to be able to meet first payroll.’

“I said, ‘I gotta hear this story.’

“He was impressive. He knew his industry. He had a lot of experience. I asked him how did he get into this mess, what was the bank, how much did they lend you? And he told me. I asked what was the basis of the loan? You spent it all on the equipment and the lease-hold improvements. He said, well, they looked at the value of my home and they gave me a home-equity loan.

“I said: ‘That’s all? That’s it? That’s all they did? They gave you enough rope to hang yourself.’

“So we sat down, did some projections. What he hadn’t factored in was his payment cycle. He wasn’t going to get paid right away and so we went through the projections. I was really impressed with him so I said, we’ll make a small loan to get you through payroll, but we’ve got to get you a lender who was an SBA lender and get you an SBA loan.

“We did that and he got his SBA loan. He had some rocky times the first couple years, but after that, he really took off. He ended up, in a 10-year period, expanding in four different states and 500 employees. He finally sold it for millions.

“There was the jockey. He had the passion, knowledge and was going to make it work come hell or high water.”

How do you know you’ve found the right jockey? Well, there’s lot of tests or sets of questions you can ask. Katherine Barr, general partner at the investment firm Mohr Davidow Ventures, addresses that in her piece for Inc.com, “The 7 Must-Have Qualities Investors Look For in Entrepreneurs“:

  • Be passionate about your vision.
  • Pursue a big, bold opportunity.
  • Tell authentic stories.
  • Learn how to negotiate and problem-solve creatively.
  • Reward those who play a key role in helping you realize your vision.
  • Listen to feedback.
  • Do what you say you’re going to do.

The first three are about opportunity. The right jockeys recognize a need in a marketplace, and it aligns with something that’s personal within themselves. The final four come down to character. They show the ability to work through issues and work well with others. And they fulfill commitments.

You likely are not a lender. Still, all small-business owners or entrepreneurs have to build business relationships, whether it’s with partners, vendors or customers. These are the same kind of attributes you want from someone you are going to do business with. It’s team-building. If you surround yourself with high-character people, you vastly increase your odds of succeeding.

Click here to listen to the full What Works Podcast with John Phelps.