Five tasks to complete before requesting funding
Learn how to properly prepare for business credit requests.
In 2015, the number of U.S. Small Business Administration (SBA) 7(a) loans increased to 63,000, a 22% jump from 2014. Those loans also increased 12.2% in dollar amount, to $23.6 billion. The trend is expected to continue across small business lending.
"If you go back to 2007-08, the banks did have to pull in the reins. But with a much more stable economy, we're looking for ways to expand lending to small businesses," says Mike Strathman, division lending manager at Wells Fargo.
In order to take advantage of the new opportunities in bank financing, prepare your business with these five tasks.
1. Review your business credit profile and history.
The first thing banks look for is a strong credit history. Before you apply for financing, pull your business credit report and review your business credit accounts. Along with submitting your business credit report, be prepared to submit bank statements.2
"If you have a commercial credit card, banks want to see that you handle it responsibly — that you don't max out your credit card," Strathman says. "If you're not paying off a revolving product, that can indicate to them that your business has cash flow or liquidity problems."
2. Evaluate your personal credit profile and history.
Banks also consider your personal credit history, which should reflect responsible spending and repayment. A lender will pull your personal credit report, so be sure to do the same ahead of time, and review it carefully so it's accurate.
"We weigh very heavily the personal credit of the business owner because we view the small business and the small business owner as one and the same," Strathman says.
3. Calculate your debt-to-income ratio.
Your debt-to-income ratio — how much money you owe every month relative to how much money you make — helps banks determine how risky it is to loan you money. The lower your ratio, the less risky you are to lenders.
The sum of all your monthly debt payments ÷ Your gross monthly income = Your debt-to-income ratio
Again, both your personal and business finances matter. "On the business side, I'm asking, 'Does the company generate a positive cash flow?' On the personal side, I'm asking, 'Are you generating enough income to support not only your current debt load, but also the proposed debt that you're asking to take on?'" explains Strathman.
Be prepared to verify your business and personal incomes with tax returns from the past three years.
4. Examine your business credentials.
When assessing your creditworthiness, banks also look at your business's basic information. Be prepared to discuss the following:
Bankers view some industries, such as construction and foodservice, as risky. Businesses in these industries are more susceptible to cash flow fluctuations due to factors outside their control, such as local economic or weather conditions and local government budgets. Dental practices and other professional services, on the other hand, are considered more stable.
- Your size: The size of your business helps banks determine how much debt you can reasonably shoulder. Very small businesses, for instance, generally struggle to repay large loans.
- Your experience: A young business is a riskier investment than one with an established customer base and deep industry experience.
- Your business goals: Bankers will ask how you intend to use their funding to match you with the best product for your needs — for example, a revolving line of credit versus a term loan.
5. Check in with your banker.
Regular visits will help a banker get to know you as well as understand your business and industry. Building a relationship with your banker also helps when you're ready to request a loan, because the purpose and need for it will already be understood.
"Allow your banker to get to know you. It all starts with building a good rapport," says Strathman.
Funding requests vary depending on the type of financing you seek, but all requests should demonstrate that you handle your finances responsibly and have the capacity to repay your debt.
"All funding requests should demonstrate that you handle your finances responsibly and have the capacity to repay your debt."
Wells Fargo offers many different credit and financing products. Smaller requests may be based on stated incomes which do not require a business plan. However, if you are looking for a larger loan, an SBA loan, or a line of credit, you will need to submit a business plan along with financial statements. These statements would document your business performance or financial capacity (for newer businesses) as required by your banker.
Want to learn more about small business funding? Here are four unique ways to get your business up and running.
1 "SBA Hits Another Lending Record in FY 2014." U.S. Small Business Administration (SBA). (2014) https://www.sba.gov/content/sba-hits-another-lending-record-fy-2014
2 "Business Loan Application Checklist." SBA. https://www.sba.gov/content/business-loan-application-checklist