Chances for Business Loan Approval

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Three Steps To Maximize Chances For Business Loan Approval

If you are thinking about getting a business loan, there are three steps you must take that will maximize your chance of approval. Lenders want to applicants to have at least ONE of the three Cs — that is, cash flow, collateral (assets), and credit (personal and/or business) — in order to issue an approval for a business loan. The more of the three Cs you have, the more funding options you will have available. In other words, you have fundability. Eighty percent of business loan applications result in denials. By following these steps, however, you can increase your chances of approval.

Choose your business name and NAICS code carefully.

Businesses in high-risk industries experience far more underwriting scrutiny when applying for business credit than those associated with lower risk. In addition, high-risk businesses are much more likely to be denied business credit altogether. If your business is in an industry that may be considered high-risk, you can mitigate this possibility simply by assigning your business a name that doesn’t give the industry away. This is neither illegal nor deceptive, and it can actually help with getting business loan approval. Credit reporting bureaus like Experian include a risk assessment on their report to which lenders refer when underwriting. It is a red flag to the lender if the credit reporting bureaus list a risk associated with the company’s industry.

If you are concerned that the name of your business may cause credit reporting bureaus to consider it high-risk, you can change its name. However, if you do so, ensure you change it everywhere – incorporation documents, licenses, web site, and records with business credit reporting agencies Dun & Bradstreet, Experian and Equifax. Be sure the business information is the same at each place by copying and pasting instead of typing it out. This helps prevent errors.

Know your NAICS code, as it will identify your industry and the risk factor associated with it. When choosing the NAICS code, if there is more than one that could identify your business, choose the least risky one. Use this code on ALL YOUR INFORMATION. The NAICS code can indicate a high-risk business to lenders, banks, insurance companies, etc. The wrong choice of NAICS can automatically result in higher premiums, reduced credit limits, more stringent underwriting, or even flat-out credit denials, so choose your NAICS wisely.

Establish your business entity type and EIN

You are required to have a business entity to get financing or business credit. A C or S Corp or LLC separates you from your business, thereby reducing your liability and increasing credibility. A business must also have a federal tax identification number (or EIN), much like an individual has a social security number. It is used to build a business credit profile and open a business bank account. Make sure your business’ EIN is listed correctly on ALL information.

Set up your business information

Use a real brick & mortar building, one that is deliverable, as your business address. Do NOT use your home address, a PO Box, or a UPS mailing address. Set up a professional web site which has all your information. Do NOT use your home phone or personal cell phone number as your business line. The phone number should be toll-free and listed with 411. Be sure your all your information is accurate on your business record. (If you don’t have a business record, you can establish one on ListYourself.net.) Not following these recommendations can lead to credit application denials.
Corporations should have proper business licensing. Ensure the address on the license matches all other business documents. Contact state, county, and city government offices to find out if there are any licenses/permits required to operate your business.
The business web site and e-mail address should be professional looking. Do NOT use Yahoo, Gmail, etc. but rather a streamlined address (example: name@site.com) which is on the same domain as your site (such as GoDaddy).

When applying for business loans, don’t start with banks, as their requirements are much too stringent for startups and small business with limited cash flow, credit, or collateral. 90% of business credit comes from alternative lending sources, such as the following:

P2P (Peer To Peer) Lending

P2P (Peer to Peer) Lending – people can connect borrowers to investors and get money without a financial institution. One such lender is called Upstart. Terms vary among platforms and risk levels.

Amazon Bank Of America

Amazon Bank of America – invitation-only program whereby Amazon reduces risk by partnering with Bank of America and Merrill Lynch to give businesses discounts on over five million products. To qualify, your business needs cash flow. Loans of $1,000 to $750,000 are available. In five days after approval, you begin to receive discounts.

Paypal

PayPal – with this option, loans are dependent on your PayPal sales. To qualify you need to be in business at least nine months. PayPal can give you up to 35% of your annual sales, from $5,000 to $500,000; however, they will check credit scores and public records, which could affect your credit score.

Square

Square – this option requires no credit check. Qualification is solely dependent on your business history with Square (i.e., sales). Financing from $300 to $100,000 is available. There are no interest payments, just an ongoing flat fee.

Stripe

Stripe – a program with similar terms as PayPal and Square.

Grants

Grants – these are great for startup businesses. You simply apply for them and if accepted, you are given funds that need not be repaid. There is a lot of competition to get grants, however.

Credit Line Hybrid

Credit Line Hybrid – potentially the best program for startup businesses. You can get up to $150,000 in credit lines for 0% rates. These require good personal credit, or a personal guarantor who has good personal credit, to qualify. These lenders do report to business credit bureau agencies.

Commercial Real Estate Financing

Commercial Real Estate Financing – can be used to purchase real estate or borrow against real estate already owned. Now is a good time to purchase commercial real estate; you can get a great deal with even average credit with little to no down money. Loans can be up to 80% to 85% of the property’s value.

Auto Financing

Auto Financing – mileage will affect terms of loans as well as age, if purchasing a used vehicle. Auto financing may require a personal guarantee; however, if you have built good business credit (comprised of about fourteen accounts), you most likely can obtain financing without a it. You will need to provide documentation to the lender that you’re a business owner: business licenses, partnership agreements, LLC documents, etc.

Equipment Financing

Equipment Financing – purchasing or borrowing assets for your business can help you to build better business credit.

Private Lending

Private Lending – this is funded by investors or banks which make private business-purpose loans from private investors. A FICO score of 620+ is required; however, approvals are much easier to get via this option than SBA.

Bridge Loans

Bridge Loans – provide immediate cash flow to transition from one situation to another. These are short term, typically less than a year, but have high rates and are backed by collateral. A Credit Line Hybrid can offer a bridge as an add-on or alternative to other financing. This will be a fixed monthly payment, cash term loan of $25,000 to $300,000. A credit score of 680+ and income over $35,000 is required. Debt-to -income ratio determines the terms.

Blanket Real Estate Loans

Blanket Real Estate Loans – business owners can consolidate two or more property loans into one, allowing them to purchase commercial investments. These loans are good for commercial or residential landlords, construction companies, and property developers/flippers. An advantage to this option is that even if one (or more) of the properties is sold, the proceeds are applied to the loan and instead of being called, payments are only due on the remaining portion of the loan. Therefore, no refinance is necessary. Financing is available for $75,000+ and terms are 2 to 30 years at 4% to 11% rates. Loans may balloon at 15 years, at which point the remainder of the balance is due. Origination fees are typically 1% to 3% of the loan amount.

Second Or Third Position Revenue Lending Loans

Second or Third Position Revenue Lending Loans – subordinate lending to provide more funds to a business owner who hasn’t yet repaid an older loan or line of credit. This is also known as loan stacking. Second or third place lenders are satisfied after the first lien holder in the event of a foreclosure. No credit check is required, but you must be in business for at least six months and have $5,000 in revenue. These loans are often funded by alternative lenders. The rate is dependent on risk, so rates can be high and terms are typically shorter. Future lenders will check if you have subordinate liens. Prior to obtaining second or third position financing, the first lienholder must agree to subordination by other lenders.

Term Loans

Term Loans – these are easier to qualify for if you have business credit. These often have lower rates and offer higher loan amounts than other options.

SBA Loans

SBA Loans – traditional financing that can be up to $5 million for terms of 20 to 30 years and have low rates. To qualify, applicants need good credit, collateral, and cash flow. Lenders will require tax returns from the past three years and proof of collateral (assets, accounts receivable, etc.) Applicants must have absolutely no credit issues to obtain SBA financing. Banks will only fund companies who have strong financials (i.e., revenue and cash flow) and near perfect credit scores and collateral. They also require personal credit checks.

Below are some tips on building business credit.

  • First, establish vendor accounts. These usually do not require collateral, cash flow, or good personal credit, but will help to build a credit profile and score because they report to business credit reporting agencies within 60 days. (Not all report; you must inquire.) Terms vary but many are net term 30 days. Be sure to consistently pay early or on time.
  • Once you have five vendor accounts, begin to establish retail credit from places like Staples, Lowe’s, Amazon, etc. Retailers check for uniformity in your business information and whether your business is licensed properly. Again, pay on these accounts early or on time.
  • After you’ve established eight accounts on your business credit report, apply for fleet credit. This is used for fuel, vehicle repair, and maintenance. In other words, these are gasoline credit cards issued by BP, Chevron, Sunoco, etc. If you’re not in business long enough to qualify for fleet credit, you can still get it by providing personal guarantee or a deposit. Continue to pay early or on time.
  • Finally, once you have at least fourteen accounts on your business credit report, you can apply for bank credit cards such as Visa, Mastercard, and American Express. These will give you optimal spending power to purchase supplies and materials for your business.