Review business needs before you apply for credit

Learn some of the steps you can take to help ensure your business assets are optimized before you apply.

Published: October 23, 2019

Like many aspects of running a business, the process of applying for credit can evolve as your company does. When you needed start-up financing, personal savings or personal credit might have been the most readily available options. Now that you’re able to prove the sustainability of your business, you may want to consider obtaining credit that better supports the particular needs of your business or industry.

It’s essential to ensure you’re undertaking this process in a way that may help set your business up for longterm success and maintain its wellbeing as you pursue new credit avenues.

First, match the right credit product with your business needs

To prove creditworthiness, begin by demonstrating you are able to identify appropriate products for your needs.

“It is key that you’re matching the term and the structure of the credit to the type of need that you have,” says Carmen Brun, senior vice president of small business term lending at Wells Fargo. “For example, if you buy a piece of equipment, and it lasts 10 years, you don’t want to still be owing money on it in year 11.”

Similarly, securing a loan with collateral that may not endure the length of your repayment period probably isn’t the most suitable credit option.

Consider in general terms:

  • Credit cards are better suited to helping to establish credit for a business and increasing day-to-day purchasing power.

  • Lines of credit are better for supplementing cash flow and covering unexpected expenses.

  • Loans are better for bigger, planned purchases, such as equipment and paying off debt over time with lower interest rates.

Next, evaluate the complexity of your credit needs

In some situations, a business owner’s credit needs may be considered complex. For example, the ownership structure of the business can often complicate the situation – such as when there are multiple individual owners, or some or all of the ownership is held in a trust or by other corporations.

If your business requires multiple credit products, the documentation often will be more complicated when the bank cross-collateralizes and cross-defaults all of the credit, says Mike Strathman, senior vice president and division lending manager at Wells Fargo. In more complex situations, the bank may enlist legal assistance to prepare the actual loan agreement.

“Since a more seasoned business has built more capital, it gets back to, ‘What is the business trying to do?’” notes Brun. “The complexity and dollar amount of the credit may become more of a driver [around your approval].”

Consult with your financial partners

Work with your key financial stakeholders and any outside subject matter experts to confirm you’re looking into the type of credit that will provide the greatest value to your business efforts within a reasonable amount of time. Go over what to expect during the application process to help prepare required documentation in advance.

Strathman recommends starting with your banker to discuss the purpose driving the business credit needs and what possible products and solutions meet those needs. Your banker also can explain what type of financial information will be needed to help you make a more informed decision.

Then, talk to your CPA to help verify your business has the capacity to repay the debt. Ensure the new credit will not create an unhealthy amount of leverage on your balance sheet. Your accountant may help ensure all financial information is accurate and up to date to meet the bank’s requirements in order to make a credit decision.

To ensure you’re taking on debt pragmatically, refer to the current ratio formula (Current Ratio = Current Assets / Current Liabilities). Businesses should typically aim for a current ratio above 1.0, which means liabilities do not exceed assets.

Then, re-evaluate budgets

As more accurate assessments of valuations are developed, re-evaluate your budgets accordingly. Consider how your accounts payable reflect business priorities, which may have shifted since you last acquired a major client, completed a fiscal year, or made a structural change to operations.

If you’ve been overvaluing certain items, strategic cost management may help you reassess your business expenses. Conversely, learning you possess more capital than you previously thought could provide you more funds to invest back into the business. Demonstrating that you’re allocating funds strategically, with the goal of contributing to the priorities you sought credit for, may be another way to show lenders you’re serious about these efforts.

Brun recommends asking: Will financing close a shortterm gap in cash flow or cover larger expenses? Will that purchase help you generate value above and beyond the cost of financing? Planning for the impact of financing on your business may help you decide how much, if any, financing to pursue.

This process may help you determine whether to pursue a new credit option or sit tight with newfound resources and options.