Tips from the Loan Officer’s Side of the Desk

If you’re in the market for a small business loan right now, you’re likely finding more closed bank vaults than usual. Many long-term lenders are overwhelmed and distracted with their deteriorating consumer portfolios and are either unable or unwilling to open their doors to small business customers.

But there is money available. Here are some tips that will help you navigate the application process when applying for a loan to obtain the needed financing to grow your business.

1. Some lenders make all of their loan decisions based on an electronic scoring system. You earn “points” for certain behaviors and criteria. Look for a bank that also does judgmental lending, where a real person reviews your applications and speaks to you either in person or over the phone instead of solely using a computer program to make decisions. You’re more likely to get the rate and credit line you want.

2. Communicate what you expect upfront so the lender understands the amount and term of the loan you desire and does not provide you with financing that does not meet your needs.

3. Many third-party agencies, such as loan brokers and consultants, charge excessive finder’s fees for searching for small business loans. Consider working directly with a financial institution instead of using a broker or consultant to find you the loan you need.

4. Don’t use your personal credit for your small business. Most banks will look at statements from both your personal and business credit histories to make a decision, but you should make sure your bank is willing to keep your business and personal credit separate by not reporting business loans to your personal credit report if you remain in good standing. It can affect the rate you pay and your ability to take out a personal loan and refinance your house and the like.

5. Make sure to report all household income, including any income from your spouse or from sources other than your business. This includes income from investments and rental properties. Lenders want to ensure you can meet all of your financial obligations. Because they will include all of your personal and business debt in debt-to-income and debt-service calculations, you need to make sure all of the income actually servicing that debt is taken into consideration or else you may end up paying a higher rate or not be approved at all.

6. If your personal credit has a minor blemish, ask to talk to the lender or offer to provide an explanation in writing so you can put some context around the situation.

7. If the total amount of revolving debt, such as credit cards, home equity loans, lines of credit, and so on, in your personal credit file exceeds 25 percent of your annual income, be prepared to explain what it was used for and how you plan to pay down or pay off the balances. A lender is less likely to approve a loan for an applicant who couldn’t say no to a sale and has no plan to pay down debt vs. an applicant who spent $25,000 to buy new computers for a business and plans to have the debt paid off in three months. Remember, revolving credit, regardless of the type of loan, is meant to be used as a short-term financing tool.

Ed Harycki is chief executive officer of Wilmington, Del.–based Swift Financial, a direct financial services company dedicated to serving small businesses.