The Business Loan Qualifying Process Can Be Critical
In Acquiring Debt Financing
Most people don’t realize that
business
loan qualifying is actually a two way process. The
lender will obviously be qualifying your application,
but you also need to be qualifying the lender.
That’s right. You need to
qualify the lender. Otherwise, how are you going to keep
control of the process?
Too often, business owners go with hat in hand to a
lender, almost begging for a loan. What they tend to
forget is that they are the customer and the lender is
trying to sell them something.
But in the world of business financing, the roles get
reversed, and in most cases the lender ends up
controlling the entire business loan qualifying process.
The vast majority of the time, the lender holds all the
cards. They tell you to come in and make an application,
they ask you to provide certain types of information,
and then they decide whether you get financing or not.
It’s very much a “trust me, I know what’s best for you”
type of process.
It doesn’t have to be that way. In order to take
control, you need to understand the business loan
qualifying process.
Borrower fundamentals of business loan qualifying
are:
1. A detailed understanding of your financial situation
2. A detailed understanding of what a particular lender
can do for you.
Let’s go through an example.
Say you are a business owner and make an appointment to
come in and see your bank’s account manager. You sit
down with the account manager/lending officer/business
specialist to inquire about a business loan. The
lender’s front line representative suggests that you
take a set of application forms home to fill out. You
complete the forms to the best of your ability and
submit them to the lender.
The lender takes the forms, and gets back to you with a
yes or no answer.
If you get approved, this may seem like a reasonable
business loan qualifying process. What happens when you
don’t get an approval? What exactly was the reason for
being declined? What do you do next? If you did get
approved, are the terms and conditions suitable?
The more you know and understand about business loan
qualifying, the better you be able to control the
process and get the results you are looking for.
Let’s look at the business loan qualifying process from
both the lender’s and borrower’s points of view.
Lender View
Even though what might be important to one lender may
not always be important to another, the basic lending
criteria and borrower validation points are largely the
same.
A lender effectively wants to understand the borrower’s
story: what is borrower’s recent history, where he/she
is today in terms of financial performance and
stability, what is the borrower planning to do on a
going forward basis.
In order to be the most effective, the elements of the
story need to be told in a certain order.
The first element of the story is purpose. Is the
borrower starting up a business, acquiring a business,
expanding a business, or consolidating debt?
Any loan application will primarily fit in one of these
categories. This will provide a preliminary view of loan
category and lending risk.
Next, the lender would prefer to know how much money is
being requested and what will be the exact
application of the funds; the more precise the
better. The lender will also want to know how much of
the borrower’s personal funds or business funds
are being invested in the transaction. This will
indicate the level of financial leverage that is being
requested, the related industry application, and the
business purpose.
The lender will then want to understand the financial
track record of the business over the last three
years if possible and a detailed balance sheet to
establish the current market value of all assets and
debts. This will indicate the current financial
stability of the business as well as gain an
understanding of the outstanding debt, how it’s being
serviced, and how it’s secured.
Once clear on where the business is today, the lender
will want to understand what the business is
projected to look like over the next three years,
and what steps are to be taken to achieve the expected
result. This provides the lender with the ability to
assess debt repayment.
The lender will also be interested in the basic
resume of the owner and key employees to help
determine their collective abilities to manage the
business properly on a go forward basis.
Lastly, the lender wants to know all about the credit
history of the borrower and the borrower’s business.
This is viewed to be a strong indication of future
ability to make appropriate and timely debt payments.
This is a very basic outline of required information.
Certain lending scenarios will not require all the
information listed, but many will require far more in
one or several of the areas identified in their unique
business loan qualifying process.
But as a borrower, your only direction for information
assembly and presentation may come from the lenders
application forms. If you have ever filled out forms
that require financial information, you already know
that it’s not always clear what is required. So, without
some detailed understanding of what is appropriate, the
business loan qualifying process can be placed at risk.
Why?
Because when you are conveying the information to a
marketing representative of the lender, who may convey
the information to a senior location manager, who in
turn conveys the information to an underwriter, there is
no room for information gaps or vagaries.
Anytime you have more than two human beings trying to
develop a consistent understanding, you are likely going
to have inconsistencies in understanding and
interpretation, which can make or break a loan
application.
You may not know this, but an underwriter usually has
the final say as to who gets a loan and who does not. An
underwriter works on behalf of the provider of the
funds, and applies financing criteria to loan
applications to see if a financing request can be
approved.
The person you deal with at a bank, for instance, is
unlikely to be an underwriter. There is a separation of
duties here so that financing criteria can be applied in
an unbiased fashion, creating some consistency in the
process which serves to manage the risk level of the
ultimate lender’s portfolio.
Here’s where the qualifying process can break down even
further. The marketing person in charge of your loan
application may not have a good understanding of what
the underwriter or underwriters requires. Some front
line representatives work with one underwriter, some
work with several. There may be times the person you are
dealing with will not have an excellent understanding of
what the underwriters are looking for, and there may be
times their role is more of an information collector.
If you are turned down for financing, you may not
receive a full explanation as to why, and once the
decision is made, it’s unlikely to be overturned even if
there was some relevant information that was missed the
first time around.
The lender is interested in full discloser, but they do
not always achieve full understanding during business
loan qualifying. The lending agent is trying to process
requests in volume and cannot be overly focused with
anyone one application.
Borrower’s View
A borrower is generally interested in obtaining the
financing they require at the best terms and rates
possible, in the shortest amount of time. In order to
achieve this result, the borrower should consider their
own business loan qualifying process.
After discussing the Lender’s View above, I have
summarized some of assumptions you may potentially make
when going through the business loan qualifying process.
• The person you are dealing with directly at the bank,
credit union, trust company, etc., will make the final
decision as to whether or not to approve your financing
request. False. Normally an
underwriter will make that final decision. Your
marketing representative will either decline you at the
start or make a recommendation to the underwriter to
further process the application.
• Thoroughly understanding your past, present, and
expected future financial position will not likely
benefit your application. False.
The faster you can demonstrate accurate knowledge of
your business, the harder the marketing representative
will work on your behalf.
• Regardless of what information you provide, anything
that is unclear will be followed up so that a proper
decision can be made. False.
Once again, we are dealing with human beings that are
working in a volume based system. The onus is on you to
provide the right information in the right form and to
assure proper understanding.
• All lenders are pretty much the same, so there is no
point doing any pre-qualifying of the lender before you
make an application. False. There
can be considerable differences in lender programs and
also in the knowledge of the marketing representatives
you are dealing with. If time and money are important to
you, consider making an effort to understand the lending
sources that are the most relevant to your needs.
• If it’s not stated on the application form, there is
no benefit to providing additional information in order
to develop a more complete understanding of your loan
application, business strategy, and business operations.
False. As long as the information is
relevant, clarifying information normally helps reduce
misunderstandings and assumptions that can work against
you. A basic business plan can be a valuable support
tool.
Remember, that as a borrower you are the buyer. Before
you spend too much time with anyone seller, you should
consider your own business loan qualifying process.
As an astute buyer, you may want to consider some, or
all of the business loan qualifying steps that follow.
1. Develop a short list of lenders that you feel would
be seriously interested in your borrowing proposal.
2. Review your scenario with them verbally either over
the phone or in person.
3. Ask them if any of their clients have been approved
for similar loans in the last year, and if they have,
ask them to indicate how many.
4. If they can demonstrate to you that they have the
knowledge and their organization has the track record of
providing financing for your specific needs, have them
outline the supporting documentation they would need to
see and a range of rates and terms that might apply.
5. Compile the required information, and set up an
appointment for a more detailed review. You should
consider bringing your own copy of your credit report
from one of the credit bureaus as well. It is very
important to protect your
credit score during the application process. You can
also ask if the lender representative can review the
preliminary information with the relevant underwriter.
6. If from a buyer perspective all indications are
positive, then proceed to complete a formal application.
Through this borrower based business loan qualifying
approach, you goal should be to find out as quickly as
possible which lenders you should be spending your time
with, putting you in greater control of the overall
business qualifying process.
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