I need a Small Business Loan…but I have some issues

April, 2016

Getting a loan for your small business can be difficult for some. Maybe you just started your business or maybe you have been in business for years but had a hard year financially or some credit problems in the past. Here is a guide to help you understand what banks look for and how to overcome some of those issues.

New Business – New Businesses have the hardest time getting Small Business Loans…why? Because 8 out of 10 Businesses fail there first year, most every business owner knows that but there is no shortage of people wanting to start a businesses. Bill Gates did it with Microsoft so why can’t you.  Banks, Credit Unions, Finance Company’s and even Hard Money Lenders cringes when they hear “I just stated my own business, and I need a loan”

But you hear from the Government and other sources that there are funds out there, which is true! So Why does one business get financing when the other one cant. The answer is simple… PLANNING!!

NEVER go to a bank and say I need money when you have no money to put into your business for startup capital. I can’t tell you how many times this happens.  You want a banker to return your call, say “I am staring a New XYZ business and I have 20% down but need some help with the rest” You WILL get a call back. Did you save money to start your business or do you have a side investor set up, which is all a part of the overall planning.

Also make sure to have a Business Plan. Don’t think that business plans have to be elaborate. Higher the loan amount you are seeking the longer the business plan. Need $350,000, you better have a great PROVEN plan with some solid projections for the next 3 years. Need $75,000 a one or 2 page document will be just fine with projections.

Challenging Personal Credit History- 2009 was a horrible year, more people filed Bankruptcy and lost houses that year than any other time in the last several decades.  Maybe you were a contractor and worked primarily with home builders, maybe you lost your job, whatever the case what banks care about is what you have done SINCE the bankruptcy.

Your credit score is one of the 5 C’s of credit that banks look at that. Do you pay your bills on time, do you say what you are going to do, and is your word any good. If you have a credit score under a 640 be prepared to go through the grinder or get an immediate no.

Did you just file Bankruptcy in the last 2 years? The banks is probably going to say no regardless of the situation, it’s just too new for the bank to take a risk…sorry. Bad things like Bankruptcies, Foreclosures, Short Sales, Late Payments, and Collections all stay on your credit report for 10 years. Most larger banks will say no if they see that within the 10 years. Smaller and mid-sized banks may be willing to take a chance on you after a few years when the dust settles. If you are this point let me give you a few tips.

1. DO NOT HIDE IT! Tell the banker that you had an issue and come to the table with a written explanation why it happened. Banks are in the RISK business, not the money business as you may think. If you come to the table with a reason why you had the issue and what you did since then it can go a long way. (ie. You now have liquid cash of $50,000 saved, you have lived without credit for the last 5 years because you learned your lesson, and you are now seeking a small loan amount etc.)
2. Foreclosures and Short Sales – If you had to give a house back to the bank or a short sale during hard times, again let the dust settle and share with the banker what you have done since that hardship. Maybe you got a new mortgage 2 years ago and have never been late on that loan and you have had spotless credit since the issue. Additional things that will help is if you have a little more skin to put in the game (more cash, more collateral etc.) for your new loan request.
3. Judgements & Liens – This one can get a little sticky. Say you were a week late paying your property taxes and they reported it to the credit reports…ok, have a good story on why you were late, most underwriters can get through that. You haven’t paid child support or 5 years or you haven’t paid your payroll taxes in 10…there is no story that will overcome that one. You will need to fix it and let the dust settle.

You had a bad year financially-  I had a client that came to me for a loan and had a bad 2014 where they lost money, but did ok the year before and the year after. Well we can’t blame that on the economy so as the banker I needed to discover why. In their case they had a merger and merged 4 businesses into 1, ok- that was a good answer, the expenses of doing that are high. With a little more digging we were able to overcome that because they were one time expenses. Now if this same business came to me in 2014 or shortly after the chances of us saying yes would be thin, why? LET THE DUST SETTLE. Again, Banks are in the risk business and if you had a bad year you have to show that you have gotten out of it, banks will not lend to you in a downward trend, prove you can get out of it with your credit still attached and you will go much further.

The main thing that I want to make sure you are aware of is “Let the Dust Settle” You have to show a bank that yes, you did experience a hardship and you overcame it and you have proof of that, only time can heal old wounds.