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How to develop a strong credit application
Discover what steps to take when you are preparing a credit application with your banker.
"Before you apply for credit, you should understand the purpose of the loan."
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Welcome to the Wells Fargo Business Insight Series. My name is Shellie Phillips. There’s a lot of information to cover when it comes to preparing for and having a credit conversation with your banker. When you’re seeking credit for your business, it’s best to approach the task with four topics in mind: credit purpose, credit history — both personal and business — company finances, and application and accurate documentation.
Let’s start with the first topic: credit purpose. Simply put, credit purpose is how the funds will be used. Before you apply for credit, you should have a clear understanding of the purpose of the loan or line of credit you are seeking. Is it for equipment? Inventory? Is it a short-term or long-term need? Financial institutions want to understand the purpose of the funding and how it will help your business. Thoughtful preparation will help your banker recommend the right credit solutions to best meet your specific need. The next question you should ask yourself is, is the amount I’m requesting realistic, and does it fit the business need? An example would be asking for a $300,000 loan from Wells Fargo when your business only supports the ability to repay a $100,000 debt. If it’s determined that the amount doesn’t fit what your business can support, Wells Fargo may instead counter offer you a lower amount or may decide not to make a credit offer.
As a business owner seeking credit from a financial institution, you’ll want to do a fair amount of preparation before you submit an application. A great place to start with your preparation is to have a firm understanding of where you and your business stand financially. It begins with knowing and understanding your credit history — both personal and business. Pay close attention to your payment history and credit profile, as they can impact your ability to obtain credit. Items that can impact a credit decision include a well-established credit profile, timely payments and a limited number of recent credit inquiries. Being overextended on existing loans or credit cards, as well as having interest-only mortgages can also impact a credit decision. Wells Fargo wants to lend money to customers who pay their obligations on time, control the amount of outstanding debt and maintain good vendor relationships.
If you, or your business, have experienced credit challenges in the past, here are some actions you can take to begin repairing your credit. First, correct errors on your credit report by contacting the various agencies. Pay down debt on credit cards, loans and lines of credit. And set up automatic payments to minimize the chance of late payments. Taking these steps will help you become a more qualified credit candidate in the future.
As a business owner, another area that you should have a firm grasp on is the ability to repay the debt. A key component to do this successfully is to understand the cash flow you’ll need to cover the debt you incur. When it comes to obtaining additional credit, your full financial picture will be evaluated to ensure you can qualify for the new credit you are applying for in addition to supporting all of your existing credit obligations. It’s recommended that you do cash flow projections to understand what your numbers will look like over a rolling 12- month period and anticipate your bottom line so you aren’t left in a crunch.
Wells Fargo will first look at the income generated from the business as the initial repayment source. They will review your business’s financial history as an indicator of the ability to repay future debt. It is important that your financial data is accurate and reflects your current situation. For a secure line of credit or loan, Wells Fargo wants to know what type of collateral you are bringing to the table. Wells Fargo may underwrite the extension of credit with your spouse’s income, which can be used as a secondary source of repayment if applicable. The bank may also consider your personal investments and potentially those of your spouse as an additional source of repayment. Be sure you know all of the areas that a bank may consider to give you a better chance to obtain credit.
In order to submit a strong application, you’ll need to make sure that it’s complete and free of mistakes. Here are some key areas to keep in mind when you are working with your banker to complete your credit application. One: The date the business was established. Be sure to provide the date the business was established and not the date the entity changed ownership or entity type. An example would be if you originally established your business as a sole proprietorship and then decided to incorporate, you would use the date the company was originally established as a sole proprietorship and not the date it incorporated.
Two: annual gross business sales. Make sure to use the actual gross sales stated on the prior year’s tax return and not a projection of estimated sales for the year.
Three: gross annual income. Use annual earnings, which include all income sources received as stated on a prior year’s tax return. Be sure not to use monthly earnings.
Four: business name and address. Use the legal business name and address as represented on your articles of incorporation or other business registration documents, not a dba.
And finally, five: ownership. Use the current ownership with the correct documentation to validate.
By taking the time to understand what Wells Fargo looks for when you apply for business credit, you will give yourself a better chance of obtaining credit by being properly prepared.
We hope you enjoyed this segment of the Business Insight Series. We’ll end with a recap of the key points mentioned, and as always, we wish you continued success.
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Clearly explain how the funds will be used
Make sure that your credit request is realistic
Understand both your personal and business credit history
Be a responsible borrower
Repair your credit history if needed
Demonstrate positive cash flow
Ensure accurate company financial data
Application and Accurate Documentation
Make sure the application is complete and free of mistakes