Business Loans

What Lenders Look at When You Apply for a Business Loan.

Small business owners must understand what lenders look for when approving a loan. Proper context and perspective are vital to securing the best loan approval for your specific situation. Applying for a small business loan should not be an opaque time-consuming process. Here are six data points all small business owners should know.


American essayist and philosopher, Henry Thoreau famously opined: “it is not what you look at that matters, it is what you see.” Consequently, small business owners must understand what lenders look for when approving a loan. Proper context and perspective are vital to securing the best loan approval for your specific situation. Applying for a small business loan should not be an opaque time-consuming process. Here are six data points all small business owners should know.

A. EXISTING INDUSTRY & BUSINESS TRENDS

Your BIG PICTURE industry picture counts. What are the prevailing external /internal business trends?  What about the regulatory & market headwinds in your sector? Can you explain your industry pressures? Is the growth arrow going up or down? Lenders may view your industry favorably or unfavorably based upon micro and macroeconomic trends. Know your industry and be willing to underscore how you are positioned to favorably buck and/or benefit from any industry trends.

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B. BUSINESS CREDIT

 

Business owners usually fall in one of two boxes. On one end, many have no established business credit. Instead, they have focused on personal credit -not realizing you need to play the piano with both hands. On the other end, many business owners have no idea of their business credit score and have no understanding of how it is evaluated. Not knowing and not having are both detriments too securing a business loan.

You MUST establish business credit and you MUST know your business credit score. Get acquainted with Dunn & Bradstreet PAYDEX; FICO Liquid Credit ; Intelliscore Plus from Experian, and Paynet . These are business credit reporting agencies that evaluate your business risk profile. Know where you stand especially on Paynet (which is becoming the industry standard). With Paynet ,a business core above 690 is considered very good.

 

C. PERSONAL CREDIT.

What is your tri-merged FICO score? Those are Experian, Transunion, Equifax reporting agencies? How many trade lines do you have? What is your score with each agency? What is your credit utilization? Any inaccuracies? Do not wait until you need a loan to check. You need to know where you stand. Get your personal credit in order BEFORE you apply. Many lenders look for a 720 FICO or better for their best rates. 680 is usually the minimum FICO score to qualify for the premium programs.

D. COLLATERAL

Asset’s count! It could be real estate equity, business assets in accounts receivables, inventory, or equipment. Other assets can be stocks, bonds, retirement accounts, cash value life insurance, annuities, and now crypto currency. Assets are like an extra blanket in winter. It gives lenders comfort knowing if your business hits a speed bump, you have assets to tap to keep things going.

E. PROFITABILITY -DSCR

To qualify for premium term loan programs, lenders look at your profitability. Therein lays the conundrum. Many small businesses look to obfuscate their income to minimize their tax obligations. You cannot have it both ways. Lenders look at profitability via bank statements and net income on your most recent business tax returns (and year to date financials).  One key measure is your debt service cover ratio. DSCR is calculated by taking your net income and dividing it by your annual debt service(with the proposed loan terms added ). Lenders want to see $ 1.25 in cash flow for every dollar you have in debt. DSCR=$1.25+ better is key.

F. USE OF PROCEEDS

 

How will this loan impact your bottom line? What kind of ROI will you generate? Let your lender know how this loan will put you in a better situation. Provide the data and evidence to highlight the financial benefits.  This is an overlooked, yet vital piece to approval success.

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