Why Small Things Make Big Differences In The Lending World
Many business owners attempt to access capital without knowing what lenders truly care about.
This is a BIG mistake. Sometimes some small things can make a big difference in your approval and in your loan amount.
Below I’ve come up with the 10 things lenders care about that you probably don’t know. Every type of financing is different and different loan products require difference stipulations to be in place.
However, after financing 100′s of millions of dollars (this year alone) we’ve come up with the most common stips required for financing.
1. You must have a business entity in place for a minimum of 6 months.
The fact is most small businesses fail. In fact, some studies show 8 out of every 10 businesses fail. With this being true, lenders take a big risk financing small businesses that are pre-revenue. They like to see businesses that have some seasoning (even as little as 6 months) before they are willing to look at the remainder of the business.
2. For working capital loans, you must be generating steady consistent revenues each month.
I qualify that statement by saying “working capital loans“. Majority of loans are not angel investor or venture capital debt loans as these are different. But typically, lenders require businesses to be up and running, looking for capital for growth. This requires bank deposits each month, and that can have a big impact on the amount of loan available for the borrower.
3. Cannot have an open bankruptcy.
This is almost impossible to overcome in any industry or type of financing. No lender will take the risk of dealing with a borrower in open bankruptcy. However, once the bankruptcy is closed or discharged and seasoned for 1 year, there are financing options that open for small business owners. We like to lend on the asset (the business) and not the borrower. But there is too much risk with an open bankruptcy.
4. Industry Type
We speak with 1000′s of businesses each week. Because of this we see a lot of different industries and markets. Each market and type of business has its own ebbs and flows. Lenders care about this. For instance, a trucker owner/operator may have a more difficult time acquiring financing than a bar or nightclub. The amount of clients (people who pay the business) varies and this has a big impact on approval and underwriting.
5. Declining Bank Statements
No lender wants to see declining bank statements. If you’re bank statements are falling from say $50,000 to $42,000 to $37,000 this can be a red flag for lenders. The majority of firms do not like to lend when the thought is “we are saving this business.” Lenders like to lend to healthy growing businesses with no cash flow issues. We realize cash flow issues occur and we have things in place to overcome that. Just keep in mind this can cause an issue.
6. Do You Have a Business Plan and Executive Summary
This can be an absolute deal killer when attempting to acquire startup or large amounts of capital. Private equity firms and venture capitalists require each potential borrowers to have a detailed executive summary and business plan which includes details about the industry, company, current situation, opportunities, use of funds, growth and exit strategy as well as a number of other items each specific lender may require. It’s good to know what the plan is. You can check out how to write a business plan here.
7. Have You Used Debt or Equity Financing In The Past
Lenders like doing business with entrepreneurs who have acquired financing in the past. The borrower understands the terms, conditions, and what’s expected. There’s also a relationship that forms between the borrower and lender and when this happens, the lender always lends more than second time once you have a proven track record. A proven track record of successful payments in the past can really help business owners get approved for higher amounts. Start small, build the relationship, and you’ll be rewarded over time.
8. How do you manage your cash flow
You should see how many businesses owners we speak with that withdrawal money from the business bank account in Vegas. This is not smart. LOL. No lender wants to see irresponsible business owners managing their cash flow poorly. We’ve had loans die a miserable death because of the way the small business owner manages the cash flow of the business.
9. Number of deposits
This is a biggie. It’s easiest to give an example. A contractor may only have a few jobs a month. This means they may only be depositing 4-5 times a month a few checks. The lenders look at deposits as the stability of the business. If this contractor loses one job, that could be 20-25% of his business. That’s large. If you get paid and are depositing only 5-10 checks a month, spread them out, go to the bank 2-3 times a week. I know this may seem small but even if you deposit multiple checks on the same day, the lender counts this as one deposit.
It’s all about location, location, location. You’ll see business owners in New York city receive higher loan amounts than business owners in Lakeland, Fl. Not only does that matter but also whether or not you have a physical address. Many times, lenders will do site inspections on higher loan amounts. They want store fronts as opposed to virtual addresses. A P.O. Box listed as the business address can cause issues if not handled properly.
Both personal credit and business credit are taken into account. The weight they carry will vary from lender to lender. Traditional style banking requires good credit. Most alternative lending options look at the business and weigh more of the underwriting on the businesses cash flow and assets. You can read how credit and lending affect each other here.
All lenders are different and have their little quirks. Navigating the variety of lenders can be a daunting task and that’s the reason why so many business owners fail at accessing capital. I put this short list to try and help small business owners know the top things lenders care about. If you need help navigating the financing arena, it’s better to ask for someone to handle it for you while you can continue to grow your business, than getting headaches because you’re getting the run around. We see it everyday. If you at least have the above in place you’ll give yourself the best shot at receiving financing from alternative lenders.