If you’re thinking of applying for a business loan, you might be wondering how a lender makes the decision to approve or decline your loan application. And if you are approved for a loan, how is the amount or term decided? Here’s a behind-the-scenes look at some of the ways your lender makes those decisions.
First and foremost your bank or other lending institution is going to look at your financial past. This information is available through a variety of commercial and personal credit agencies. For many small businesses and those without a long and established financial history, the business itself may not have enough financial data available for the lender to make a decision about a loan. In this case the personal credit history becomes the first and biggest factor in assessing your credit worthiness. And while it’s true that a correctly established business will protect the owner’s individual assets from business losses, it does not mean that lenders won’t consider your personal credit history and habits in evaluating your creditworthiness.
What are they looking for? Let’s examine a few of the specifics that tell the story of your ability to borrow and pay back money.
An established credit history with a good credit score
Established, as in, you’ve done this many times before. Not only are you familiar with the process, but there is a documented history of your borrowing and paying responsibly. That will be reflected in your score.
Opening multiple credit cards or lines of credit in a short amount of time
While applying for a credit card or a loan is a normal and healthy part of building “good credit”, applying for multiple lines of credit in a short period of time may signal to a lender that the applicant is having some sort of financial difficulty.
Credit card or other loan payment history
Lenders may check to see that you’ve been making your payments on time. Not only that, but a history of making the credit card’s minimum payment is another red flag that you might be experiencing financial hardship. While it’s acceptable to make minimum payments once in a while, it should be the exception, not the rule.
Cash advances
A history that includes advances like “payday loans” can concern lenders because they are usually associated with extremely high interest rates. Lenders perceive these as a “last resort” for the applicant.
Judgements and Liens
No lender wants to see that you haven’t paid your taxes or other legally ordered obligations. If these are a part of your credit history, be prepared to show that you have or are making arrangements to pay back these debts.
A comprehensive personal financial statement
Though technically not a part of the credit report, a well-organized statement of your financial situation will go a long way toward impressing lenders. It can help to explain any negatives found on your credit report and shows your lender that you care about your finances enough to keep them in order. It also helps you specify your assets that may not otherwise be apparent to the lender.
Finally, keep in mind that there are other factors a lender takes into account when processing a loan. If you feel like you fall short on some of the criteria above, it doesn’t automatically mean you won’t qualify. The key is to take a long term, proactive approach to keeping your credit score healthy. If you are in a rebuilding phase, talk with your lender and use a personal financial statement or other requested documentation to help the lender understand that you have the ability to borrow and pay back money responsibly. Applying for a loan? The experts at Advantage+ will be happy to answer any questions that you might have.
