Need a Business Loan? Data Drives Loan Decisions
[ Article was originally posted on www.nav.com ]
Several years ago I was talking with a local community banker that did a lot of SBA-guaranteed loans every year. As we were talking about the challenges some of the smallest small business owners face when looking for a loan, she casually mentioned that her bank’s SBA loan application was 40 pages long. I understand that data drives loan decisions and that bankers (as well as the SBA) want to make sure they have all the information they need to make an informed decision about a business’ creditworthiness, but a 40-page application seemed a little over the top in this information age.
With that being said, on the other end of the spectrum, are the business owners looking for financing who sometimes chafe at a few simple questions designed to help a loan officer determine their creditworthiness and the type of financing that might best suit their current business needs. Fortunately, many lenders don’t require you to complete a long and cumbersome loan application today, but there are some basic questions they need the answers to so they can help you find the right type of financing for your current business situation.
8 Questions You Should Be Prepared to Answer and Why
Once you’ve found a potential lender, there are a handful of questions they will ask right out of the gate that will help them know how best to help you. At Nav, for instance, because we work with several lenders these questions will help us direct you to the type of financing that makes the most sense to meet your business objectives. Because data drives loan decisions, both you and your lender will be grasping at straws and it will make the loan application process more difficult without this information.
How Quickly Do You Need Financing (Are You Looking for a Loan Today)?
Although this might not be how they ask it, most lenders want to know if you are really serious about a small business loan or simply kicking tires. I recognize that it’s not exactly the same thing, but for the last few years I’d been contemplating adding a shed to my back yard. I talked to a number of companies trying to get an idea of what it would cost me, but none of them really took me seriously until I said I was ready to actually do the deal and schedule the date.
Loan officers might not treat a potential borrower in the same way those salesmen treated me, but you should expect there to be a difference in how they react to someone who is actively looking for a loan right now than someone who is “just thinking about it”. In my case, I didn’t blame the salesperson for their less-than-enthusiastic response before I was ready to sign on the dotted line—they wanted to spend their time with people who were serious and ready to make a deal. You shouldn’t expect any less from your lender.
How Long Have You Been In Business?
I wish I could say this didn’t matter, but it does. Traditional lenders like banks want to see several years in business, but there are online lenders who will work with your business if you’ve only been in business for a year or two. Basically, they are trying to look at your track record. The longer you’ve been in business, the more likely you will be to make your periodic payments. It will also influence the type of financing you’re offered.
What Is Your Annual Revenue and Cash Flow?
This is an important question because it will help your lender determine if your business has the financial means to service debt—to make each and every periodic payment.
I once spoke with a business owner who was frustrated that he couldn’t find a loan for his business. He responded to an article I had published and bemoaned the fact that there wasn’t a lender that would give him the several hundred thousand dollars he was looking for.
I started by asking him about his time in business and his annual revenues. He responded that he hadn’t launched the business yet and didn’t have any revenues. I asked him about his personal credit profile, which he said was “poor.” He didn’t like my answer.
An idea-stage company with no revenue, and no cash, combined with a business owner with a “poor” personal credit history will likely not get financing with any lender. There is no data from which to make a creditworthiness assessment and what data there is (the personal credit score) isn’t good.
Before you apply for a loan with anyone, you will need to know your revenue and cash flow numbers so you can demonstrate that you have the ability to service debt.
What Is Your Industry?
The cold hard truth associated with this question is that some industries are considered bigger credit risks than others. The good news is that not all lenders evaluate those risks the same way. For example, traditional lenders like banks tend to shy away from small restaurants while many only lenders make a lot of loans to restaurants.
Before you approach a lender for a loan you should look at their restricted industry list (usually published somewhere on their website). It will help you determine if your application will get an automatic “No” when you apply. You may also find a lender that specializes in your industry.
What Is Your Personal Credit Score?
For most small business owners, your personal credit score will always be a part of any creditworthiness discussion. The lower your personal score, the fewer options you will have when it comes time to borrow. A strong credit score doesn’t necessarily guarantee a loan approval, but it will give you options a borrower with a poor personal credit history won’t have access to. At the very least, it will put your application at the top of the application pile.
Make sure you know your personal score before you apply for a business loan.
Answer “Yes” to ID Verification
Many lenders want to verify your identity before you start a loan application. This is just a good idea—at least if you are who you say you are. Allowing them to verify your identity will give them information that will help them make a good decision about you and your business.
The same is true for access to your business checking account information. This information will help them better understand your business finances so they can make a better-informed decision about your loan application.
Why Do You Need the Financing?
When I’m talking to small business owners about financing, this is one of the first questions I ask. There are a lot of specialized financing options available today that are sometimes better suited for some loan purposes than others. Equipment financing quickly comes to mind, but that isn’t the only specialized financing option.
Don’t be put off when your lender asks you what your loan purpose is, knowing the answer will help them offer you the financing best suited to meet that need.
How Much Money Are You Looking For?
There are a number of reasons why this is an important question. For starters, some lenders have minimums and caps associated with the amount of money they will loan. For example, some lenders prefer larger loan amounts of $1 million or more and don’t do loans of $50,000 or less. While other lenders specialize in those smaller loan amounts.
Additionally, when I ask a borrower how much they are looking for and their answer is, “As much as I can get,” I cringe. Regardless of who you borrow from and how low (or high) the interest rate might be, there are costs associated with borrowing and borrowing more than you need, because you can, could put your business in a lot of financial stress.
Because Data Drives Loan Decisions, Arm Yourself With Information
I once spoke with a lender who said, “If I can tell more about a small business’ financial health by looking at the financial records than the business owner, I’m not going to give them a loan.”
Granted, the dive into your financial health will come after these questions are answered to get the loan process started, but the same applies here. Any business owner who can’t (or isn’t willing) to answer these basic questions isn’t going to get very far with any kind of loan officer or specialist. Yet, the business owner who can, will likely get moved to the head of the line, get a quick answer on his or her loan application, and find the financing they need to fuel growth or fund other business initiatives.
Francis Bacon said, “Knowledge is power.” In regard to a small business loan in today’s economic climate, data drives loan decisions.
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