GETTING YOUR first small business loan can be an exciting time. It can also be a nightmare if you’re not prepared for the loan process. Much like a residential loan, to qualify for a commercial/small business loan or a line of credit, you’ll have to go through a similar process.The steps required are usually the same; regardless of the type of loan (or the amount) you may be seeking. They include these critical phases:
  • Loan Application
  • Pre-Approval
  • Processing
  • Underwriting
  • Approval (hopefully!)
  • Closing
To get to that final step, you’ll be required to get through each hurdle of the process in order to take a seat at the closing table. But what exactly is the lender looking for anyway? Well, in previous articles given numerous descriptions regarding the particular documents they may be seeking, and as explained in detail, it is important to be able to produce any and all documents in a timely manner.  These documents must also be up to date and accurate in every way to support your case for receiving the financing being sought. However, the best way to illustrate the overall prerequisites the lender may set forth is to explain the three categories of significance that could make or break a loan proposal. It is known as the “Three C’s.” Let’s take a look at them one by one:
“The Three C’s” of Credit
  • Character: You are popular, successful and a pillar in the community. Everybody thinks highly of you as a trustworthy individual and your spouse thinks you’re simply the greatest. That’s wonderful; however, this isn’t the variety of character approval creditors are seeking here. The character the lender refers to is how you (the borrower) have handled your past debt obligations. In essence, “are you likely to pay back the money if it is lent to you?” Lenders often look for another “C” within this category as well.  It’s referred to as consistency.  “What does your job history look like?”  “How long have you lived in the area?”   Longevity in employment and residency indicate stability.  Other indicators lenders will seek out will be your credit history and your personal background.
  • Capacity:  One quick way to define capacity is “your present and future ability to meet financial obligations.” Another way to look at it might be “your income and other resources minus other debt payments.” Either way, what the credit grantor wants to find out is what your overall capability of paying back the loan or extension of credit being considered will be.  One crucial element of this category is the debt-to-income ratio (or DTI).  Some lenders also simply refer to it as a debt ratio. This ratio is calculated by totaling your consumer debt (credit cards and installment loans) and adding to that number your housing debt (mortgage payment, property taxes and insurances). This number is then divided by your income. Things to keep in mind are that the acceptable debt-to-income ratio is many times dependent upon the other two “C’s” of Credit, and many lenders have different ratios for different loan programs. The interest rates can also be greatly affected by your overall capacity.
  • Collateral: The credit grantor may seek to use property, financial assets, or other valuables that could be employed as security to guarantee the repayment of a loan.  Nearly every lender wants to be sure that you have something of value that could be sold and/or leveraged in case you default on the agreed-upon terms. A house, land, a savings/money market account, or anything with a legitimate appraised value, for example, could be used to collateralize a loan or extension of credit.  
Down the Road
At some point, your small business may grow and expand to the point where your personal information, collateral and/or credit rating may not be utilized by the bank or other lending organizations. Your small business may decide to transition to a certain type of corporation or entity, add investors, institute a board of directors, add locations, and/or carry out numerous other long-range plans that will change the scope and future of your business dealings.  With that being said, transactions at your bank may also take on different variations as well.

As your business grows, it can become completely self-sufficient from the need to provide personal credit or collateral toward approval of a creditor’s loan decision process. This could be for numerous reasons. However, if your business follows the same guidelines as you did as an individual when you first sought financing, the transition should be seamless. Keeping excellent records, maintaining up-to-date files, and being able to provide any/all documentation the lender is seeking will continue to be mandatory for loan approval. Because your business now has a track record of success, it will be able to stand on its own merit in most cases.

Once your business establishes this track record, creditors and other entities will be able to utilize those records through outside organizations to assist them in making sound decisions on your small business.  One such company is Dun & Bradstreet. Often referred to D&B, this public company, based in the United States, licenses all types of information on businesses and corporations for assistance in making credit decisions. These reports are also used in business-to-business marketing and supply chain management decisions as well. D&B maintains information on over 200 million companies worldwide.
The Golden Rule
The moral of this particular story is pretty simple. You (and ultimately your small business) must be determined, regardless of the size, scope or nature of your business, to establish, maintain and archive impeccable records and documentation. This practice should never waver for any reason either. Whether you’ll be seeking to grow, gain financing, or even to sell your business, your records and documentation will be what the lenders, creditors and potential buyers will be examining for decision-making purposes.