Useful information on how banks typically make lending decisions.
Building your credit is important to growing your business, whether or not you ultimately secure business financing from Great Florida Bank. You will improve your chances of securing business credit by educating yourself on the factors many banks look at when making a lending decision.
The Five C’s of Lending Decisions
Here are some important questions to consider before you apply for credit.
If you are, you will be asked to complete and submit the loan application. If there are multiple owners of your business, then typically at least two of them will need to submit their information with the application.
Your financial performance over time is usually a good measure of where you have been and where you are going. To get conventional bank financing, it helps to have been in business for at least five years and profitable for the last three years.
If either you or your business has declared bankruptcy within the last 10 years, chances are most banks will not lend to you — unless you have repaid all of your creditors. The best way for you to re-establish a good credit record is to repay your creditors as soon as possible.
Many banks use a business credit-reporting agency to see how you have paid your trade suppliers and other business obligations. They use a consumer credit-reporting agency to see how you have handled your personal debt. While an occasional late or missed payment is understandable, if you consistently pay late, you may not qualify for business credit. Sometimes you just need to set up an accounting system to ensure that you pay all your bills on schedule. If you find that you are consistently running short of cash, then you should take steps to trim expenses, increase sales revenues or raise equity for your business.
In the case of a tax lien or a legal judgment against you or your firm, the beneficiary of any settlement stands first in line for payment. The best thing to do before you apply for business credit is to pay and release all liens and judgments, and settle all suits.
Credit cards, lines of credit and loans are a key part of every individual's credit record. A strong credit history proves you have the willingness and discipline to repay debts. Lack of a credit record makes it much more difficult to borrow money. If you do not have credit today, secure credit soon and use it wisely. Good places to start include trade credit, credit cards, auto loans, home equity and lines of credit.
Tax returns are a quick way to determine if you have shown a profit in the last few years. If your business is not profitable, it may be difficult for you to make the payments on your credit line or loan. So, if your business is not profitable, examine your expenses for opportunities to cut back and look at your sales for opportunities to increase revenues. Maybe you can sell more to a current customer. Alternatively, you might need more customers. You can also visit http://www.sba.gov/ for details on the U.S. Small Business Administration and information on government programs for small business owners.
Many banks look at the cash your business generates as the primary repayment source for the money they lend you. Banks compute the cash in your business by adding non-cash expenses (such as depreciation and amortization) to net profits. If your business does not generate $1.50 in cash for every $1 in debt payments, then you will need to look for ways to decrease expenses or increase sales to boost the cash in your business.
Are you ready to apply for business financing, or do you have questions? Call or email us we are here to help you and your business!