February 2021

Factors that impact loan decisions (and how to increase your approval odds)

As your business grows, you may want to pursue opportunities that require more funds than you have on hand. If you are considering applying for financing to close the gap, it is important to understand what lenders look for when evaluating a loan application.

Factors that contribute to loan decisions

How you will use the loan

Lenders want to make sure you’re using the right product for your needs. Options may include small business credit cards, which are designed to help you manage day-to-day expenses; a line of credit, which is generally used for short-term working capital needs; and a commercial term loan, which is best for financing larger investments over time.

If you’re not sure which type of financing you need, ask your banker for advice. “They can help you look at different options and decide the best one for your situation,” says Jarett Isralow, Small Business Strategy and Product executive with Bank of America.

Read more: “Financing options for small businesses”

The amount of financing you’re seeking

Attempting to borrow more than your business can afford is a red flag to lenders. Lenders may also question the application if you don’t borrow enough for your demonstrated need. “If a doctor is applying for a loan for a new practice but isn’t including the office build-out, they could end up cash-strapped. It may make sense to borrow those additional funds, so they have more cash on hand in the short term,” Isralow says. Seek advice from your accountant or banker on how much to borrow.

Your business and personal credit profile

When you submit your credit application, lenders will typically look at both your business credit and your personal credit standing. “You’re almost always going to have to sign a personal guarantee on a small business loan,” Isralow says. A personal guarantee is a legally binding promise to repay money — from your personal assets — that your business has borrowed.

Before you submit a credit application, review both your personal and business credit reports for delinquent accounts (or incorrectly reported delinquencies) with all major credit reporting agencies. Business credit reporting agencies include Dun & Bradstreet, Experian and Equifax; you can check your personal credit reports with Experian, Equifax and TransUnion. If there is any negative information in your credit report, submit an explanation so the lender can better understand the situation.

Read more: “Credit score basics for small businesses”

Your capacity to repay

Your application should also demonstrate your ability to pay back borrowed money. “A lender may ask for at least two years of personal and business tax returns, a debt schedule that includes details of all of your business debts, and personal financial statements,” says Chris Ward, Small Business Credit executive with Bank of America. He adds that lenders now might also ask for profit and loss and balance sheet statements, “in order to understand the impact the pandemic may have had on the business.”

Keep reading — Access the entire article at our Small Business Resources site.

To discuss your business goals, set aside some time for a telephone call with a Small Business Specialist.

MAP3388939 | 1/2021