What Items Do Lenders Check in Their Business Loan Approval Process?

Applying for a business loan? It doesn't matter if you are just starting out, or have been operating businesses for years. It's a scary process. You can take a lot of the apprehension and worry out of the procedure of applying for a loan by simply understanding what it is that lenders look for, and how to do your best to put your business' best foot forward.

Are You Really a Business?

To begin, it is important to look like a business. That sounds deceptively easy. You may think you look like a business just because you have a product or service, and are offering it up to the public. Perhaps you have a website in place and maybe you have even obtained a business credit number from Dun & Bradstreet, but don't stop there. That isn't even the basic requirements for a business in the eyes of most lenders.

Achieving the Basics when Building a Business Presence

Don't forget your "street cred." Even a strictly online business will benefit from having a physical presence. An address makes your business appear more official, not only to lenders but often to consumers as well.

It isn't enough to just have an address though. You need to make sure that it is listed in the US Postal Service Database. Looking up the physical address in the official resource is in a routine background check of most lenders. There is an 80% rejection rate for unlisted businesses.

A phone number, preferably a landline even though a large percentage of all business in conducted by cell phone, is also a concrete part of a business' physical persona. Your business' phone number should appear in the National 411 Directory Assistance, an easy check for any lender.

Lenders may also check the FCC, also known as the Federal Communications Commission, to see if your business' phone shows up, along with the company's physical address, cell phone, fax, etc.

Your business must comply with Federal Tax laws. No legitimate lender is going to give a business owner the time of day if they do not have the necessary paperwork that shows they are, themselves, legitimate. This is a simple process and there is no excuse for not having done the work to make your company compliant.

Making your business a recognized company simply means obtaining an EIN. The EIN, also known as an Employer Identification Number can be applied for by mail or online. It just takes minutes and if you apply for it online the number is automatically generated.

The DUNS number from Dun & Bradstreet is different from the EIN. The EIN makes you tax compliant, the DUNS number makes you credit compliant. It is the number all business credit reporting is done under. If you haven't already applied for a DUNS number, that is something that needs to be done well in advance to applying for any financing. It can take several weeks to obtain the number once the application is submitted via the website.

Is Your Business An Entity?

Anyone can be a legitimate business. When listing a company you can be a sole proprietor, however lenders are less likely to look favorably upon companies that are not legal entities that are listed with the Secretary of State in the form of an LLC or Corporation.

The reasoning behind this is simple. Companies listed with the Secretary of State are subject to reports of unsavory activity and faulty business practices. Obtaining an LLC or becoming a corporation requires some time and paperwork, but it also holds a lot of advantages in tax savings, and legal obligations as well, so it is a good idea to get started on that and have it ready before applying for any financing.

All of the items above are the basic things all business should have before even thinking about applying for a loan. However, it still doesn't mean you look like a real business to a lender. Lenders know exactly what experienced business owners do when they operate a business, and one serious step is to do due diligence.

For business owners, due diligence means they will have a completely thought out business plan. This plan does not just exist in their head as a desire to sell a predetermined amount of product in "x" number of months or years. A real business plan is a bible of operation that spells out exactly what the owner expects the business to do over a period of time, how it will get there and why that plan is feasible. To a lender, a business plan is the difference between looking like a business and looking like a hobby.

Do You Have a Good Plan?

Amongst other things, the well constructed business plan will lay out exactly who the key people in the company are, even if it is just one person, and what experience and skills they bring to the table that will make the strategy outlined work. It will also show various statistics that suggest the product or service is a good concept, if there have been past sales it will give an overview of profits or losses and projections into a foreseeable future.

If it isn't in a business plan, the lender will want to know how much you have invested in the business. This figure should be what you personally have invested, not other loans taken. The reason this is an important figure is no investor wants to be the only one with "skin in the game." They want to know you believe so much in the company that you have risked your own money as well. Of course, they will also want to know what other lenders may have a stake in the company also.

Other lenders or forms of financing can be a double edged sword when it comes to loan acceptance. Having other lenders already in place can show that there is active interest and belief in your proposal. That is a good thing. However, it can also show that there isn't much equity or potential profit left over to pay additional loans. That would be a bad thing, and these are important considerations to keep in mind when thinking about applying for further financing.

Is Your Business Credit Worthy?

Getting a business loan is all about making lenders believe your company is reliable and capable of repaying the principle and the interest involved. Even when you know deep in your heart that you are a good and trustworthy person, there is simply no way a lender can know. Even if they want to believe you are, or have some degree of personal knowledge of you as a human being, they cannot allow that to cloud their judgment.

There must be empirical proof that there is a basis for trust when lending money to a business operation. That empirical proof comes in the form of a solid credit history. When no business credit history exists your personal credit should be exemplary to show that you have a reliable history of debt payment.