Whether you are talking to an SBA lender or any other lender, they all are trying to get the answer to basically 3 questions.
They cannot all ask the questions in the same way, but they’re all trying to find out the same thing.
- Can you repay a loan?
- Will you repay a loan?
- Have you made any plans if something will go wrong?
You need to know what lenders want to know before you apply for a business loan.
Can You Repay a Loan?
They probably would not ask it this way, but what lenders need to know is whether or not you have got the means to repay a loan. They will need to know what your annual revenues are?
And, they will look at your cash flow and try to determine whether or not your business has the income that will be needed to make all the periodic payments. The lenders that will be making small business loans right now, post-PPP, will be interested in your cash flow, which will be further important now than ever.
Each lender wants to be confident that you can make every and each periodic payment before they provide you a loan. What is more, because they’re all aware of the challenges various small businesses are facing right now, it is likely safe to assume they will be skeptical and will possibly want you to validate that the income and cash flow numbers you’re presenting them are accurate.
Furthermore, to wanting to see your last 3 months of bank statements, they will want to see any more info they can to verify that your bank statements are an accurate reflection of the cash flowing in and out of your business.
Will You Repay a Loan?
For most small businesses, the harsh reality is that your personal credit score will likely be part of the equation.
Which was the case with several small business owners that were denied a PPP loan? The similar will be true post PPP if you apply for a business credit card, a line of credit, or any other kind of business financing. For minimum the foreseeable future, you should expect the credit needs of several lenders to become tighter.
For instance, right now business credit cards are yet available for new borrowers, but the most creditworthy borrowers are qualifying. It is not expected to see any new lines of credit offered to several borrowers for the rest of this year, and several lenders have chosen to back away from small business term loans, making it more essential than ever to work on a less-than-unique credit profile to bring it up to snuff.
There’re lenders that will work with a borrower with a lackluster credit history, but you should expect for paying a premium. Most lenders have raised the threshold for credit scores they’ll work with, but several lenders use your personal credit score as a go no go metric to determine if they’ll even accept your application. For instance, if your personal credit score is below 680.
The odds are slim they will even want to talk to you. In a post-COVID-19 world, most lenders will understand the conditions that can negatively impact an otherwise better borrower’s credit. Be prepared to explain what happened and the steps you have taken to correct the challenges that caused your credit issues. The better you’re able to demonstrate that you’ll repay a loan, the odds of finding a lender willing to provide you a business loan increase.
Do You Have a Plan?
Nobody needs to think about worst-case scenarios, but lenders do it each day. And lenders want to know that you’ve thought about it too. In an effort to mitigate the risk of making a loan, they spend much time and effort thinking of what can go wrong and ensuring you’ve thought about it too and have some type of plan should it really happen.
That is one of the reasons traditional lenders need to secure a business loan with collateral and why other lenders will file a UCC lien on your business assets. That’s why almost all small business lenders will want a personal guarantee.
The perfect way to avoid this situation is to ensure you have got the means to repay the loan regardless of what happens. Do not gamble with borrowed capital. If you cannot show the lender that you’re able to make timely payments regardless of what happens, it’ll make it that much harder to qualify for a loan.
Though different lenders can ask the questions differently, the answers to these 3 questions help them make decisions about whether or not to provide you a loan. If you can reply to them for their satisfaction, then it will improve the odds of a successful loan application. If nothing else, you know what you want to work on to improve your chances down the road now.
Credit History
This plays a big role in a lender’s decision to qualify you for a loan and credit card.
Your credit history is your financial track record that shows how you’ve managed credit and made payments over time. This history may be seen in your 3 credit reports, which provide all the info from lenders that have previously given you credit. This data could vary among the different credit reporting agencies but will include the same info like the names of lenders that extended credit, the kinds of credit, your payment history, and more.
Most lenders like for seeing a best payment history, lower amounts of debt, and no missed or late payments. Your credit history is captured into a single number called credit scores. Your credit scores are one of the 1st things that lenders look at when assessing your credit history.
Having the best credit score increases your odds of getting approved for a loan and helps with the conditions of the offer like what the interest rate will be. There’re several different types of credit scores. FICO® Scores and Vantage Score® are 2 of the more common kinds of credit scores, but other industry-specific scores exist.
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