Can You Qualify for a Loan?

Do you have a good personal credit history? Good personal credit history is one of the most important factors in identifying borrowers that will repay their commercial loans. If you do not have a recent credit report, find out about ordering one by calling TransUnion at (800) 916- 8800, Experiean (formerly TRW) at (800) 682-7654, or Equifax at (800) 685-1111. If you have credit problems but they can be explained by a one-time incident such as medical problems, provide information on the problem and how it has been rectified.

If you have had a bankruptcy in the past seven years (10 years for an SBA loan), or have slow payments, collections, etc., then it may be difficult to obtain financing now. If the poor credit history can be explained by a particular incident, supply information on the situation and how you attempted to repair the past credit problems. If you have consistent credit problems, you will need to repair your credit history and rebuild your credit track history. Call your local Consumer Credit Counseling Agency (CCCA) for assistance. Call (800) 255-2227 for the nearest CCA.

Have you filed your personal and business income and business taxes? Lenders and government loan programs alike want to see that an individual has met their tax obligations for both filing and paying taxes. Many of the loan programs are in partnership with government agencies. These loan programs do not look favorably on individuals or businesses who have unpaid income and/or business taxes. For SBA loans, an income tax verification is obtained from the IRS before a loan is closed.

Have you demonstrated that your business has the ability to repay a loan? (For existing businesses) If the business is profitable, then there are demonstrated profits to repay some amount of new debt. If a business is not profitable, it becomes very important to prove how it will be profitable in the near future so that a loan can be repaid. Small Business Development Centers offer training and counseling that can assist you in the process.

(For start-up businesses) It is very important that you find as much data on comparable businesses or industry statistics as possible in order to "prove" the revenues you intend to generate and the expenses you anticipate incurring. Much of the market research information can be found at your local

Does your business have a positive net worth? (For existing businesses) The net worth of the business should be positive. If loans from shareholders are on the balance sheet and you are able to subordinate these (not pay the shareholders) while you pay the bank loan back, you may consider these loans from shareholders as equity.

Is your business carrying too much debt? (for existing businesses) Businesses that have too much debt will find that their profits are directed at paying back loans and not building retained earnings in the business that can fund future growth. Consequently, banks and government loan programs look more favorably at loan requests that do not add too much debt to the business. Banks often look for a debt to net worth ratio of 3 or less (total liabilities divided by equity). SBDC consultants can assist in the assessment of your debt situation.

Have you invested your own money into the business? All loan programs require that the business owner invest their own money into the business. This owner equity injection shows that the owners believe in the business enough to risk their own money. A good rule of thumb is 20% or more equity injection, unless strong evidence exists that other factors (for example, strong management experience, known franchise business, etc.,) reduce the need for an equity contribution. The more equity, the more favorably potential lenders will view the loan request. Neither banks nor SBA will provide 100% financing.

Do you have enough collateral to secure a business loan? Business and personal assets can be considered collateral, or a way to repay the loan if the business defaults on a loan. Most collateral is valued at an amount less than market value based on a variety of factors. Although the SBA will not deny a loan due solely to the lack of, or amount of, collateral, the more collateral one has, the more likely a deal will be favorably considered. Unwillingness to pledge assets can be a basis for decline.

Are you willing to personally guarantee a loan? Most business owners are asked for a personal guarantee in order to obtain their first business loans.

Does your business have managers and advisors capable of leading your business to the next level of growth? As businesses expand, more sophisticated management is needed in strategic planning, marketing, record keeping, inventory control, personnel, and so on. If some sectors of your business need assistance, consider attending one of the SBDC's entrepreneurial training classes, meet with an SBDC consultant, or consider some of the other local business resources.

Do you have experience in running your own business? For a new business, demonstrating experience in and knowledge of the industry if vital. If you have never owned or operated a small business previously, attending an entrepreneurial training class is strongly recommended.