Image credit: PhotoAlto/Eric Audras | Getty Images
Getting turned down for a small-business loan isn’t quite like getting turned down for a consumer loan. Trying to figure out why you didn’t qualify can be an exercise in frustration. Case in point: I once knew a business owner who made real estate signs for a living. You see them all the time — simple frameworks advertising a house for sale and providing the name and contact info of the real estate agent brokering the deal.
His business was solid. He had years of experience and good credit scores. His i’s were duly dotted, his t’s correctly crossed. But he couldn’t find a single bank that would give him a business loan.
Frustrated, he asked me and my partner for help. After some digging, we learned that his business’s SIC code — a four-digit number used to classify industries according to risk — was listed incorrectly. Lenders believed he was a real estate agent instead of a guy who manufactured signs for them.
The type of financing he’d been applying for was not the type for which a real estate agent would qualify. His experience, his revenues, his killer credit scores — none of it mattered. Thanks to a clerical error, his turndowns were automatic.
Why applying for a business loan is hard.
Consumer credit can seem relatively straightforward. You apply for a loan or credit card, and get accepted or declined based on your income and credit score. Commercial credit, on the other hand, can be much more perplexing — as the business owner I described above so painfully discovered.
Typically, commercial credit decisions boil down to three main questions:
- How long have you been in business?
- Does your business earn enough revenue to repay the loan?
- What does your credit history say about your track record of paying back your business’s bills?
But there are many variations on these questions that make it a lot less simple than it seems. Take the issue of credit reports, to name just one. There are three major commercial credit bureaus, like there are three major consumer credit bureaus. But the commercial agencies have low data consistency from bureau to bureau.
With consumer credit, the vast majority of data is reported to all three major bureaus. Commercial credit reporting isn’t nearly as dependable. In fact, it’s not at all unusual for a business owner who is checking his business credit reports to find very different information on each report. One reason for this is that business credit card data is reported to the three major business bureaus by only a few major issuers.
In other words, you may think your business credit is fine because you pay your bills on time. But unless you’ve actually checked it, you may be in for an unpleasant surprise. It’s perfectly possible that the companies you do business with aren’t reporting your punctuality to the bureaus.
To confuse matters even further, business lenders specialize. They may specialize geographically, by industry or by loan type. If your business is in the wrong industry, or if its SIC code indicates you’re in the wrong industry, you could be out of luck. If you’re like my sign-manufacturer friend, you probably don’t even know what code is associated with your business and how lenders view that.
Finally, if you’re turned down for this or for any other factor, you may not find out the specific reason. Typically, there’s no requirement — as there is with consumer credit — to disclose why you were denied or to provide you with a free copy of the credit report that was used in the decision.
Then there’s the matter of having your business credit checked. Consumer credit reports can only be accessed by lenders in clear-cut situations spelled out under federal law. Not so with commercial credit. Your merchant processor will pull your credit, your payroll server will pull your credit, your business insurer will pull your credit — there are dozens of scenarios.
It’s no exaggeration to say that your business credit can be pulled by anyone. This means that business owners should be even more diligent than consumers when it comes to credit management, because you never know who’s looking at your report.
How to make applying for a business loan easier.
The short and simple answer is — drumroll, please — education. Begin with knowing why you’re looking for financing and how much money you need. Educate yourself about common types of business financing and which business they’re best suited for.
You should also know your personal and business credit scores and what precisely is on your reports. When you apply for financing, research the lenders’ requirements beforehand. This will save you time and money. For example, if a particular lender requires personal credit scores of 700 and above but yours is 640, look elsewhere.
Start getting your paperwork in order. Some lenders will want to look at your personal and business tax returns, P&L statement, business plan or executive summary, six or more months of business bank statements and financial projections.
Remember that your time in business, revenue and credit scores are usually among the three areas that will ultimately decide everything. Wrapping your head around this stuff may seem overwhelming at first, but take comfort in the fact that you aren’t the first entrepreneur to make this journey and you won’t be the last.