If you’re wishing you could get off the roller coaster that 2020 has become, you’re not alone. Small business lenders are trying to get back on solid ground, too. One banker recently shared with me that during the first couple of months of the pandemic, the bank where he worked was busy processing requests by small business borrowers to skip loan payments. Then, a couple months in, they were allowing borrowers to make interest-only payments. Now, most customers are making full payments while the focus at the bank has shifted to getting back to making loans to businesses that qualify.
He also pointed out that the small business lending environment is not likely to return to “normal” anytime soon. Instead we are in a “new normal” where everyone will have to adapt—borrowers and lenders alike.
As you adapt, here are the three key criteria lenders and financing sources often consider when evaluating applications for financing, how those are changing, and what you need to do to prepare to get lender ready:
1. Revenues
Lenders have always taken business revenues into account, and now they’re digging in deeper. A business bank account is essential, and you may even be asked to link your bank account when you apply so the lender can analyze activity in the account. What are they looking for? Among the most important criteria:
Average balance and trends: The lender will likely calculate your average monthly balance (the last 3 or 6 months is common but 12 months may be required for seasonal businesses). It will also examine trends, especially whether balances are dropping.
Number of deposits: If your business is too heavily reliant on just a few customers or clients, that will be a problem. Ideally your business bank account should show regular deposits from multiple sources each month.
Low balance/negative days: If you regularly tap an overdraft line of credit, or if your account shows multiple NSFs (non-sufficient funds, a.k.a. bounced checks) you may find it harder to get financing. Thresholds vary by lender, but the fewer the better.
What we’re seeing now: Some lenders are increasing average monthly revenue requirements and carefully scrutinizing activity for declining monthly revenues.
2. Credit
The Fed Small Business Credit Survey confirms that some lenders will review the owner’s personal credit, some look at business credit, and others may look at both. For the 2020 SBCS, the Fed asked business owners what they relied upon when applying for financing. Respondents said they used the following:
- 12% - business credit only
- 40% - owner’s personal credit only
- 48% - both business and personal credit
If you’re not checking both personal and business credit, you may not be aware of problems that could result in your application being rejected. Both matter, so pay attention to both. For personal credit, the federally mandated free credit report website, AnnualCreditReport.com, gives consumers free copies of their credit reports. Currently they are offering free weekly reports due to coronavirus. In addition, there are more than 138 places you can check and monitor your credit scores for free. It’s a good idea to monitor your credit through all three major consumer credit agencies: Equifax, Experian and Transunion.
There’s no similar requirement for free business credit reports. You can check them at the major credit bureaus—Dun & Bradstreet, Equifax and Experian (usually for a fee)-- and Nav offers free credit monitoring that covers all three of the major commercial bureaus.
What we’re seeing now: Many lenders who check the owner’s personal credit have been raising minimum credit score requirements. The SBA recently raised the minimum FICO SBSS credit score requirement for certain SBA loans. Lenders may also check business credit for red flags such as missed payments, tax liens or undisclosed debt.
3. Time in Business
The longer your business has been in business, the better. Simply the fact that your business survives the first few years makes it less risky. A business that incorporates (whether that’s an LLC, S Corp or C Corp), has a clear start date. Sole proprietors will have fewer options than an incorporated business when it comes to financing, so take that step and form your legal entity as soon as feasible. If that’s not possible, at least get required business licenses and register your business with the state. This usually involves filing a fictitious name or DBA (“doing business as”) with your Secretary of State.
Then, make sure you use the start date of your business consistently when filling out credit applications.
What we’re seeing now: Some lenders have extended their time in business requirements. One lender we work with at Nav, for example, had a 6-month time in business requirement at the beginning of this year. Now it’s 3 years!
As we move into the fourth quarter of 2020 and 2021, we’ll no doubt see more small business volatility. Lender requirements will continue to adjust, and small business owners who pay attention to the fundamentals will find it easier to adapt and get the financing they need.
About the Author
Gerri Detweiler
Gerri's been guiding individuals through the confusing world of finance and credit for 20+ years. She is the author or coauthor of five books, including her most recent, Finance Your Own Business: Get on the Financing Fast Track. Today, Gerri serves as the Education Director for Nav, an online platform that matches small business owners to their best financing options and gives free access to personal and business credit scores.
