Things to know to get approved for a business loan
Special to the Bonanza
Myths and misconceptions about the reason banks in Truckee and Incline Village decline loans and the rate at which this happens are as common today as ever.
Let me share a few credit basics Truckee and Incline Village small business owners should know before applying for a loan that may make the loan review process easier to understand.
For a banker, evaluating a credit application means reviewing the five Cs of credit: credit history, collateral, capital, conditions and capacity. Here are some things you may not know about the five Cs:
Did you know both business and personal credit history are important when pursuing business credit, particularly smaller loans? Looking at credit history helps us answer the question: How has the borrower handled credit obligations?
Both business and personal credit are relevant. On the personal side, a lender will look at the business owner’s history of credit management including FICO score and details of their credit record.
A lender also will want to know whether the business applying for credit has paid suppliers and other business obligations in a timely manner, including those to other financial institutions.
Did you know that when it comes to “capital,” a banker wants to see that an owner has a significant investment of personal capital in a business? When a lender sees the owner invest money in the business, it shows that the business owner is committed to succeeding.
What’s more, a business owner with assets that can be converted into cash in case of a sudden downturn in revenue will be better able to operate his or her business and repay debt.
Did you know that “conditions” are both internal and external factors that affect the ability of a business to repay a loan, as well as the intended use of the loan?
For example, on the external side, conditions can be economic factors, such as the strength of the housing market for businesses that are tied closely to this important sector.
On the internal side, conditions include the borrower’s business experience and knowledge. A lender will ask: Is the owner someone who has extensive experience in the industry or relatively new? In some cases, business references and education are personal factors that can affect conditions.
Did you know that “collateral,” when it’s required, is a secondary source of repayment to a lender in case of default? Collateral can include personal assets like investments and CDs and business assets such as real estate, inventory, equipment and accounts receivable.
Collateral doesn’t replace good payment history or showing your ability to handle the proposed debt level. Nobody wins when a bank turns to the final option for repayment of liquidating collateral.
Did you know that a lender looks at cash flow and debt to determine whether a business has the “capacity” to handle new credit? Before extending a loan, a banker wants to make sure a business has the ability to repay a loan given its other pre-existing loan or payment obligations. Typically lenders look for a business seeking credit to have a debt-to-income ratio of no more than 40 to 50 percent, depending on its credit score.
When you understand the five Cs of credit, you have pretty good idea what it takes to get a business loan.
Lester Romero is the Small Banking Manager for Wells Fargo in Truckee and Incline Village. For more information, visit WellsFargoWorks.com.