There are several factors that are generally considered when a loan team is reviewing a business profile to issue a rejection or approved decision to finance equipment or provide working capital. There is some flexibility among lenders when considering different factors, but there is a common ground from which many work. Lenders with tight and stringent guidelines are typically the ones that offer the lowest rates, so they have a narrower risk profile for each decision. More flexible lenders, which means those who can work with higher risk clients, have higher rates; they win something, they lose something (customer defaults) but they are able to maintain their ROI profit margin.
The following are the basic factors that you should be aware of so that you know where you are and if there are too many red flags then you may decide not to apply for financing and go in a different direction. Learning and preparing beforehand will help you understand the process, so that at the end of the day you don’t get up and say, “Why didn’t I get approved?” These are just general guidelines and exceptions can be made, but somehow they will always have to minimize the risk to the lender.
Factor 1: time in business. This is the easiest to verify since the secretary of state where you live will have the business file registered; you must check and make sure it is in good working order and active. Less than two years puts you in the ‘start-up’ business category, which means fees will be higher and the amount you can finance will be capped at $ 30K, $ 50K, or $ 100K, depending on the others. factors. Two to five years in business is the mid-range and still requires the owner’s personal guarantee and more than five years in business is the ‘established’ category and can be approved without the owner’s guarantee with loan amounts limited only by the performance of the company.
Factor 2: Personal credit. For companies that have to personally guarantee, the credit rating of the owner is very important; particularly the younger the business. Poor, damaged, or low scores indicate how the owner might operate their business and are a strong indicator of success or failure and possible default. If your credit is in trouble, a credit repair service should be the first step before applying for any financing. Most credit repairs take at least three to six months.
Factor 3: Cash flow. The bank balances in your business account, personal account, and savings must be adequate to pay off new debt along with sufficient protection for emergencies. If you deposit $ 1000 and spend $ 1000, then there are no reserves for emergencies or new debt, even if the new equipment will make you a lot of money. Insurers look for cash inflows and reserves that can cover business slowdowns, emergencies, etc. The amount needed will depend on the amount you want to finance.
Factor 4: Comparable loan experience. Credit seeks to see what it has financed in the past; For newer businesses, your personal loan will come into play. Auto loans, home loans, credit cards and the like will be important to see how they have been handled. As a business ages, you’ll want to make sure you finance even small equipment and take out business credit cards to help establish a business credit history. Some vendors offer financing for small tools, and even if you can pay cash, you must fund it to help build your profile. In the long term, comparable credit becomes very important and a necessity for many lenders.
Factor 5: Business credit. Dun & Bradstreet and Paydex are common agencies that underwriters use to review business history. These reports reveal judgments, links, pending lawsuits, and history of slow payments. You should request a copy and work to rectify any issues and, if an agreement is being worked on, a validation letter should be on file. Credit will always consider a good story to support any issue, as long as you have strong documentation. Open links need to be worked out and resolved as very few lenders will approve any open link business.
There are many other factors that a credit analyst will consider, but these five are the backbone of most credit decisions. You don’t have to be optimal at all five to get approved, but at least two of the five must be strong. Otherwise, some lenders will allow a family member to sign as guarantor for the loan, which is usually the last resort for business owners. A co-signer might allow you to get approved, but you will still be in a higher risk and higher rate category. Overall, you need to assess where you qualify, correct what you can, and if you decide to go ahead with the funding application, you will at least be better prepared for the outcome.