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The
type of business you have, how long you have
been in business, your company credit, your
personal credit, and your collateral all play a
major role in obtaining other types of capital.
Type of Business
Some lenders favor certain industries over
others. Restaurants, Food Service, Bars, Vending Companies and other retail
oriented business are not favored by
institutions. They will take your application
and will give you the same impression that you
are as likely to get a business loan with them as any
other industry, but the reality is different.
Many traditional lenders in general prefer
Medical or Legal Professionals, large
manufacturing companies or non-retail service
companies.
Time in Business
In most cases,
lenders want you to be in business for two years
or more before they will even begin to consider
you for a business loan.
Some want 3 to 5 years or more in business and 2
Years of profitable tax returns. The main reason
is that a substantial number of businesses fail
within the first 5 years. Another is that if you
haven’t been in business for 2 years or more,
you won’t have the tax returns or financial
statements they need to look at your cash flow.
In addition, it takes most companies two years
or longer before they begin to show profits that
will qualify them for loans.
Business Credit
When a business applies for a loan, the
lender often will check to see if the business
has a business credit file. The company most
often used for this purpose is Dun & Bradstreet,
although there are others such as CIT and
Experian.
The primary things lenders look for in this
report is to verify the starting date of the
company, the high credit, and look for what is
known as a “Paydex” score. This score is similar
to the “bureau” score on the personal credit
file.
Approvable Paydex scores begin at around 60,
depending on other factors, such as amount of
the request, type of request, personal credit,
but most lenders like to see a Paydex Score of
70 or higher, preferably 75 or higher. The
lender will also consider the high credit
reflected on the report and see if there are any
current past dues showing. Often, the reportings
are outdated, so you should check to make sure
your listings are current and accurate before
you apply. You should first determine if you
even have a business credit file.
If you do not have a business credit file, it is
an advantage, sometimes critical for a business
to have a strong business credit file. If you do
not have a business credit file, you can
establish one, but will have to pay a few
hundred dollars for it. This is money well
spent. The Credit agency will ask you to give
them your creditor’s basic contact and account
information. They will call to verify the
information and report it on your file.
Normally, this will take up to a month. A faster
approach is for you to call your trade
references and have them call the Business
Credit Bureau(s) to report about the accounts
you have with them. This will speed things up
greatly.
The Business Credit agencies will give you a
good idea about what kind of creditors they will
list as business credit tradelines. It is
sometimes different than personal credit trade
lines.
Example:
Acme
General Contracting buys concrete periodically
from Concrete Central. The most they have ever
bought or owed at one time was $30,000. This
would be, along with timeliness of payments, the
high credit Concrete Central would report to Dun
& Bradstreet about Acme General Contracting.
Dun & Bradstreet will often even report accounts
like Federal Express type on the file. They will
mix them in by industry rather than itemizing
them. Contact Dun & Bradstreet and other
business credit agencies for details.
What
will they look at?
If you are a large company with say $10MM in
sales per year and you are seeking a $500,000
loan request, then be prepared to provide at
least several years tax returns, accountant
audited financial statements and 6 months bank
statements for the credit review process. The
more you ask for, the more that will be
requested and the more it will be scrutinized.
Personal Credit
The credit
reviewed in Business Loan requests is not
limited to Business Credit. Your personal credit
is reviewed and considered a majority of the
time.
Many people believe when they apply for small
business loans that because the request is in
the name of the business, their personal credit
won’t be or shouldn’t be looked at. No so. In
most cases, personal credit will be reviewed and
the owners(s) of the company will be asked to
individually guarantee the loan.
The reason is that most companies are small
companies and if the owner or president has a
personal credit problem, there is a good chance
it will affect the business, including checking
accounts, business loans, etc. The larger a
company is, the less likely a personal credit
problem an owner is having will affect the
company. The size of a company is usually
determined by the Annual Sales and the number of
employees.
If a company is a Sole Proprietorship or
Partnership, the personal credit of the owners
will always be reviewed, and the owners will
always be required to sign as a guarantor. This
is because the owners are not a separate legal
entity from the company. They are the company. A
corporation is legally a separate entity from
the owners. The owners own stock in the
corporation, but it can be a small percentage of
the stock.
Generally, the only time the personal credit of
an owner may not be reviewed and the owner not
asked to be a signer on the loan is for
corporations that have been incorporated for 3
years or longer with strong business credit.
Otherwise, your personal credit will be reviewed
as part of the decision.
Collateral
The type of
collateral you have to offer when applying for
small business loans is an important factor in
determining if you will be approved.
You must qualify from a credit and cash flow
standpoint before your collateral is considered.
When you are at that point, the collateral can
be a make or break issue.
Liquid Collateral such as Certificates of
Deposit, Corporate Savings Accounts, Money
Market Accounts are most preferred, especially
by banks.
When banks suggest or ask for this type of
collateral, many applicants state that if they
had the amount of their request in cash, they
wouldn’t need a business loan. This is true, but
many businesses recognize that it can be
dangerous for them to use most or all of their
existing cash because if something comes up for
which their business needs cash fast, their
company can run into a problem. This is why some
companies apply for loans even if they have the
cash on hand. Very large companies commonly do
this and use their cash on hand as needed for
other things.
Some Banks are so conservative, they may decline
your request even if you have a Certificate of
Deposit in cash for the amount of your request.
Their reasoning is that they want a high comfort
level that you will pay the loan back from your
cash flow. They do not want to have to cash in
your collateral to repay the loan, so they don’t
want to make small business loans to companies
they feel will have trouble making the payments
solely because the company has a certificate of
deposit to cover the loan.
The owner of a company has the option of taking
personal cash funds, converting them into a
Business Certificate of Deposit, Business
Savings Account, Business Money Market Account
or Listed Stock, put it in the Business name and
use it as collateral.
Real Estate, especially personal Real Estate
such as a home with a lot of equity is one of
the most favored types of collateral. Other than
a Certificate of Deposit or Savings Account
being held as collateral, lenders feel that they
will most easily be able to recover their money
in the event of a default with a home. A lender
can sell a home more quickly and recover a
greater percentage of the loan than with a
commercial piece of property or other types of
assets.
Lenders will take commercial pieces of property
as collateral, but want to see more equity in
commercial property than in personal property
such as homes. Lenders know that it will take
them longer to sell commercial property and they
will have to offer a much greater discount from
the appraised value if they want to sell it
fast, which they need to do to recover their
money in the event of a default.
Accounts Receivable will be valued as collateral
depending on the quality of the companies that
owe the money, the time on the receivables, and
how many companies account for the total
Accounts Receivable. The pay history of these
accounts will also be looked at. How
aggressively the company works to collect the
accounts receivable on a timely basis is
considered.
Equipment is not considered a primary or
significant type of collateral by lenders.
Equipment loses it value fairly rapidly and in
the event of a default, if the lender decides to
reposes the collateral, the lender will have to
arrange for it to be picked up. It will often be
sold by a third party vendor in the secondary
market. The lender will recover a fraction of
the outstanding loan and take a significant
loss. For this reason, most lenders will over
collateralize loans with equipment as by a
significant margin, often 200% to 1000% of the
current value.
Blanket Liens are liens that cover all business
assets you own. Lenders will often try to take
everything your business owns including personal
assets such as your home as collateral for small
business loans. As a business owner you intend
to grow your business and you may need
additional small business loans for things such
as marketing expenses, expansion, raw materials,
raw materials, relocation, etc. within the next
5 years. If the lender has all of your business
assets and personal assets as collateral, you
will be in a very difficult position the next
time your business needs a loan.
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