The type of business you have, how long you have been in business,
your company credit, your personal credit, and your collateral all
play a major role in obtaining other types of capital.
Type of Business
Some lenders favor certain industries over others. Restaurants,
Food Service, Bars, Vending Companies and other retail oriented
business are not favored by institutions. They will take your application
and will give you the same impression that you are as likely to
get a business loan with them as any other industry, but the reality
is different. Many traditional lenders in general prefer Medical
or Legal Professionals, large manufacturing companies or non-retail
Time in Business
In most cases, lenders want you to be in business for two years
or more before they will even begin to consider you for a business
Some want 3 to 5 years or more in business and 2 Years of profitable
tax returns. The main reason is that a substantial number of businesses
fail within the first 5 years. Another is that if you haven’t
been in business for 2 years or more, you won’t have the tax
returns or financial statements they need to look at your cash flow.
In addition, it takes most companies two years or longer before
they begin to show profits that will qualify them for loans.
When a business applies for a loan, the lender often will check
to see if the business has a business credit file. The company most
often used for this purpose is Dun & Bradstreet, although there
are others such as CIT and Experian.
The primary things lenders look for in this report is to verify
the starting date of the company, the high credit, and look for
what is known as a “Paydex” score. This score is similar
to the “bureau” score on the personal credit file.
Approvable Paydex scores begin at around 60, depending on other
factors, such as amount of the request, type of request, personal
credit, but most lenders like to see a Paydex Score of 70 or higher,
preferably 75 or higher. The lender will also consider the high
credit reflected on the report and see if there are any current
past dues showing. Often, the reportings are outdated, so you should
check to make sure your listings are current and accurate before
you apply. You should first determine if you even have a business
If you do not have a business credit file, it is an advantage,
sometimes critical for a business to have a strong business credit
file. If you do not have a business credit file, you can establish
one, but will have to pay a few hundred dollars for it. This is
money well spent. The Credit agency will ask you to give them your
creditor’s basic contact and account information. They will
call to verify the information and report it on your file. Normally,
this will take up to a month. A faster approach is for you to call
your trade references and have them call the Business Credit Bureau(s)
to report about the accounts you have with them. This will speed
things up greatly.
The Business Credit agencies will give you a good idea about what
kind of creditors they will list as business credit tradelines.
It is sometimes different than personal credit trade lines.
Acme General Contracting buys concrete periodically from Concrete
Central. The most they have ever bought or owed at one time was
$30,000. This would be, along with timeliness of payments, the high
credit Concrete Central would report to Dun & Bradstreet about
Acme General Contracting.
Dun & Bradstreet will often even report accounts like Federal
Express type on the file. They will mix them in by industry rather
than itemizing them. Contact Dun & Bradstreet and other business
credit agencies for details.
What will they look at?
If you are a large company with say $10MM in sales per year and
you are seeking a $500,000 loan request, then be prepared to provide
at least several years tax returns, accountant audited financial
statements and 6 months bank statements for the credit review process.
The more you ask for, the more that will be requested and the more
it will be scrutinized.
The credit reviewed in Business Loan requests is not limited to
Business Credit. Your personal credit is reviewed and considered
a majority of the time.
Many people believe when they apply for small business loans that
because the request is in the name of the business, their personal
credit won’t be or shouldn’t be looked at. No so. In
most cases, personal credit will be reviewed and the owners(s) of
the company will be asked to individually guarantee the loan.
The reason is that most companies are small companies and if the
owner or president has a personal credit problem, there is a good
chance it will affect the business, including checking accounts,
business loans, etc. The larger a company is, the less likely a
personal credit problem an owner is having will affect the company.
The size of a company is usually determined by the Annual Sales
and the number of employees.
If a company is a Sole Proprietorship or Partnership, the personal
credit of the owners will always be reviewed, and the owners will
always be required to sign as a guarantor. This is because the owners
are not a separate legal entity from the company. They are the company.
A corporation is legally a separate entity from the owners. The
owners own stock in the corporation, but it can be a small percentage
of the stock.
Generally, the only time the personal credit of an owner may not
be reviewed and the owner not asked to be a signer on the loan is
for corporations that have been incorporated for 3 years or longer
with strong business credit. Otherwise, your personal credit will
be reviewed as part of the decision.
The type of collateral you have to offer when applying for small
business loans is an important factor in determining if you will
You must qualify from a credit and cash flow standpoint before
your collateral is considered. When you are at that point, the collateral
can be a make or break issue.
Liquid Collateral such as Certificates of Deposit, Corporate Savings
Accounts, Money Market Accounts are most preferred, especially by
When banks suggest or ask for this type of collateral, many applicants
state that if they had the amount of their request in cash, they
wouldn’t need a business loan. This is true, but many businesses
recognize that it can be dangerous for them to use most or all of
their existing cash because if something comes up for which their
business needs cash fast, their company can run into a problem.
This is why some companies apply for loans even if they have the
cash on hand. Very large companies commonly do this and use their
cash on hand as needed for other things.
Some Banks are so conservative, they may decline your request even
if you have a Certificate of Deposit in cash for the amount of your
request. Their reasoning is that they want a high comfort level
that you will pay the loan back from your cash flow. They do not
want to have to cash in your collateral to repay the loan, so they
don’t want to make small business loans to companies they
feel will have trouble making the payments solely because the company
has a certificate of deposit to cover the loan.
The owner of a company has the option of taking personal cash funds,
converting them into a Business Certificate of Deposit, Business
Savings Account, Business Money Market Account or Listed Stock,
put it in the Business name and use it as collateral.
Real Estate, especially personal Real Estate such as a home with
a lot of equity is one of the most favored types of collateral.
Other than a Certificate of Deposit or Savings Account being held
as collateral, lenders feel that they will most easily be able to
recover their money in the event of a default with a home. A lender
can sell a home more quickly and recover a greater percentage of
the loan than with a commercial piece of property or other types
Lenders will take commercial pieces of property as collateral,
but want to see more equity in commercial property than in personal
property such as homes. Lenders know that it will take them longer
to sell commercial property and they will have to offer a much greater
discount from the appraised value if they want to sell it fast,
which they need to do to recover their money in the event of a default.
Accounts Receivable will be valued as collateral depending on the
quality of the companies that owe the money, the time on the receivables,
and how many companies account for the total Accounts Receivable.
The pay history of these accounts will also be looked at. How aggressively
the company works to collect the accounts receivable on a timely
basis is considered.
Equipment is not considered a primary or significant type of collateral
by lenders. Equipment loses it value fairly rapidly and in the event
of a default, if the lender decides to reposes the collateral, the
lender will have to arrange for it to be picked up. It will often
be sold by a third party vendor in the secondary market. The lender
will recover a fraction of the outstanding loan and take a significant
loss. For this reason, most lenders will over collateralize loans
with equipment as by a significant margin, often 200% to 1000% of
the current value.
Blanket Liens are liens that cover all business assets you own.
Lenders will often try to take everything your business owns including
personal assets such as your home as collateral for small business
loans. As a business owner you intend to grow your business and
you may need additional small business loans for things such as
marketing expenses, expansion, raw materials, raw materials, relocation,
etc. within the next 5 years. If the lender has all of your business
assets and personal assets as collateral, you will be in a very
difficult position the next time your business needs a loan.