As the owner or operator of a business, your time is limited and valuable. Still, it is worth setting aside a few hours to prepare for your loan application to ensure that the process runs smoothly.
Each type of lending will have different requirements, and preparing the necessary details can take time. As a part of the process, you will be required to provide to your relationship manager and the loan underwriters documentation about your business and, in some cases, your personal finances. Your credit scores are often the largest factor in determining your suitability for lending, but the loan amount and its complexity are also key during review.
Here are some of the factors you should be thinking of and talking about with your relationship manager.
Check your credit scores
At the beginning of the process, talk to your relationship manager about credit score requirements. Your personal and business credit scores will impact whether you qualify for a loan, and may also impact the loan’s terms and interest rate.
- Personal credit scores: Even for a business loan, lending institutions will check personal scores and will have set minimum credit scores for qualifying people. If your business has multiple owners or stakeholders, their credit scores may also be considered.
- Business credit scores: These are, like personal credit scores, standardized and considered during the underwriting process. A strong history of business credit — such as a business credit card — can be helpful in demonstrating a strong business credit score.
How much does your business really need?
Consider the amount of the loan you are requesting because the higher the dollar amount, the more complex the loan. And loans that are complex will have greater requirements during underwriting.
Generally speaking, here are rough guidelines:
- If your loan is smaller (under $100,000, for example), your lender may check your personal credit score, time in business, and business credit score. This may be enough to satisfy the underwriters.
- If your loan is larger (over $100,000 and more complex, for example), you might also need personal financial statements, your business plan and business tax returns.
The required documentation can also depend on whether your business has an existing relationship with the lender. If your relationship manager already understands your cash flow and business model, they may not need to vet you as deeply, for example.
Real estate adds complexity
While functioning similar to residential mortgages, commercial mortgages require additional due diligence. For example, while you may not need flood insurance on a residential property, your commercial space may require your business to carry a flood insurance policy. There could be necessary appraisals, environmental reviews, details about tenants and rents, and more.
Because real estate often involves other due diligence needs, applying can take more time and you may need to provide more details about your business’s finances and plans. The bottom line is whether the business can support the payments on the property.
An underwriter seeks to answer one major question: “Can the business afford to take on this debt and pay it down based on the terms the lender is setting?”
The underwriting process is contingent on many factors, but it can be done quickly. Less complex reviews, such as credit card approvals, can take as little as a few days. As things get more complex, underwriting can take two to three weeks, factoring time for appraisals and reviews.
You can help speed the underwriting process by submitting all required documents needed at once and in an organized fashion. This facilitates the underwriters’ review and makes things go more quickly.
Loans backed by a guaranty from the U.S. Small Business Association (so-called SBA loans) will require you to collect additional information and complete additional forms. These are requirements from the SBA and can’t be avoided.
Every loan has unique qualities
Since details and timelines are different for every loan, it’s helpful to talk to your relationship manager about:
- What type of loan (or loans) would work best for my business’s plans?
- What amount could I get approved for my business?
- How much would my business’s payment be?
- How long until I get an answer?
You might start the conversation by asking “What type of loan do you think I need for my business?” and “How much money do I need for what I want to accomplish with my business?” before getting into the fine details of “What’s my rate and payment amount?”
Save time in the long-run
While collecting and preparing all the necessary paperwork listed here may seem like a burden, in the long run it will make your loan process run much smoother. You may still end up fielding requests from the bank during review, but being prepared may cut down on these requests — and lost time.
This content is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.