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Small business finance: What do lenders want?

Applying for a business loan involves more than just filling out an application and running a credit check.

The first questions are often: “What type of loan are you looking for? How much capital do you need? And do you have a written business plan with financials?”

Based on these quick points of assessment, lenders determine the feasibility of continuing to work directly with the prospect or whether the prospect should be redirected to resources like SCORE or the Small Business Development Center.

Lenders are concerned about the potential borrowers’ ability to repay the loan. Therefore, they conduct detailed assessments to learn whether the prospect has the ability and credentials to operate a business, knows the risks and understands the steps necessary to minimize the chances of failure.

To protect the investment, lenders assess borrowers credentials in the following areas:

▶ Business plan request: A written business plan covers such areas as business strategy and implementation, market research, competitive analysis, expenses, financial projections and more. Most lenders prefer a business plan with three years of financial projections. Some lenders may have slightly different requirements.

▶ Credit history verification: A good credit history with a high FICO score is required to get approved for small-business loans. Most lenders prefer that a potential borrower’s FICO score be at least around 700, or the higher the better. Some alternative lenders may settle for a lesser FICO score. If it’s an existing business, then lenders may also verify business credit history, if applicable.

▶ Experience requirement: Most lenders require potential borrowers to have at least two years of experience in the field of work relevant to the type of business they plan to start. The experience could be through a recent employment or business.

▶ Income verification: Potential borrowers must have a stable source of income through current employment, business, investments, retirement or other tracked methods of earnings. Lenders use income data and current debt-to-ratio to project a borrower’s ability to make monthly payments. If the loan is for an existing business that seeks to grow or expand, lenders will also ask for two to three years of business profit-and-loss statements.

▶ Assets and collateral: Assets could be items of value applied as collateral for a business loan. Equipment of value, financial savings, personal and business property with value or equity are some examples of assets. Note that to consider any personal or business assets as collateral, assets should not be linked to any existing loan.

▶ Down payment: Lenders do not offer 100 percent small-business loans. They want to see that the borrower has some skin in the game. How much money have you invested and how much of your own money are you willing to put down? Generally speaking, they require potential borrowers to be responsible for 25 percent to 50 percent, which could be a combination of personal or reserve funds and personal or business assets of value.

If a prospect cannot meet some of the lending requirements, an alternative option could be to have a business partner or a qualified manager apply for a business loan. If a business partner or a qualified manager gets approved, then, as a borrower, he/she will become a primary responsible party to repay the loan.

If a prospect is looking for a smaller loan amount, then the other option is microloans. A microloan is backed by the Small Business Administration. The qualification requirements for a microloan are usually more lenient than the conventional or other SBA guaranteed loan programs.

So where does SBA lending play a role in all this?

SBA is not a lender. SBA is a federal government agency that “guarantees” loans borrowers obtains from SBA-approved banks and alternative lenders. Under the SBA loan-guarantee program, if a borrower defaults on a loan because of unfortunate business circumstances, SBA becomes responsible for paying the lender borrower’s loan up to the amount guaranteed, which could be up to 75 percent of the total amount loaned to the borrower. Some other benefits of SBA-approved loans are that the interest rates and fees are usually low. Learn about SBA lending resources and loan guarantee programs at https://www.sba.gov.

Raj Tumber specializes in strategic business development. Originally from Silicon Valley, he has worked with Fortune 500 companies and attained strategic business and management skills. He is also a certified business mentor with SCORE, an organization that helps small-business formation and growth. Reach him at r@jtumber.com.

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