Video 1 Transcript
Let’s start with the basics. What is Small business lending? It is defined as a business that grosses under $10 million per year.
A majority of financing for small businesses is under $100,000.
The typical avenues of lending are the line of credit, loan & business credit card.
Did you know? Most small business financing decisions are automated. Their computer system says Yes or no.
You submit your application to your banker; they enter it into the system, and a couple of days later their computer tells them if you are approved.
You’re likely asking why do lenders use an automated system?
The most popular finance application received is for small business financing under $100,000. Processing and underwriting all of those applications can be time consuming and expensive. Lenders then streamline the process.
By streamlining the process the lender saves money, underwriting is uniform & the process is quick.
This means banks don’t have thousands of lenders making independent finance decisions all over the country. That practice is far too risky. A uniform underwriting process that is centralized allows lenders to stick with uniform lending practices. It also makes it possible for lenders to change their underwriting standards regularly to reflect the market or internal financial needs.
Lenders are mostly banking on volume. Most small businesses statistically fail, but volume diversifies and lowers their risk. Manually filing through applications that may not even be approved is expensive, to keep costs low underwriting is streamlined and automated.
What does this mean to you?
Now that you understand the process is automated you can make sure your application works within their system.
Fill out your application correctly and make sure it is legible. Unless you fill out your application, online your banker will be typing your handwritten application into their system. A zero left out could result in a decline.
Follow up!
If their system initially declines your application ask for a manual review.
Ask questions:
Ask about decline reasons, talk to a manager, and if declined after a manual review ask when you can apply again.
Once approved ask for an increase. During your first communications with a lender, you can ask them to review your file for an increase manually. Over time, you can ask for additional increases. Each lender is different; some allow increases after three months other no sooner than one year.
Be aware that if the system approved you for an amount but their manual review warrants a lower approval or even decline it is possible for them to pull their original offer. This isn’t common but is a risk.
Over time your lender will pull soft inquires to verify that your credit is still in good standing. Be aware that this takes place when you ask for an increase. If your credit has declined your limit could be lowered, or the account closed.
This is why it is important to know that when a personal guarantee is required, you must maintain your personal credit.
Applying for increases will help you build your business credit and receive higher initial approvals in the future.
Sometimes you get automated offers when you open a checking account. Should you take these?
As you know, most lenders automate their small business financing. When you apply for a business checking account lenders are pulling your personal credit. An actual business credit offer can take place at this time. Since the inquiry has already taken place, this is a very good time to add on financing without creating additional inquires. You may also be able to tack on a business loan & credit card all with the same inquiry.
Keep in mind larger financial institutions follow this practice. Make sure with your banker that the offer has already been approved and no further created check will be processed.
What about mail offers? Business owners know that they receive offers in the mail regularly. Are these a good option?
Realize that they aren’t necessarily pre-approved. Depending on the credit card offer most give you no better chance of getting approved. It is important to select the lenders carefully you apply with to maximize the use of your personal credit inquires.
This concludes this segment. Now you are thinking like a lender.
Video 2 Transcript
Did you know that most lenders view your business credit during the business finance underwriting process?
When you submit an application for a business line of credit, your business credit is reviewed!
Even your banker may not know that business credit is reviewed during the underwriting process.
Small business financing is typically automated, it is the creditors underwriting software that says yes or now, determines approval amounts and suggest the terms.
This means business credit reports are reviewed automatically.
This is why it is possible for even bankers to not to know that business credit is reviewed and in return most business owners are equally unaware.
Here are a couple of examples of how business credit is viewed by various creditors. All of the business credit agencies market their data to creditors for a fee. They package data and risk analysis, so creditors don’t have to develop their own. That’s right, business credit agencies not only offer you, the business owner, credit reports, but they also offer data to creditors.
For example here are some of D & B various options. You can see that anyone can purchase a business’s report for a single check. They also offer memberships where a lender can pull large volumes of business credit. Most business credit agencies also offer a verification only process where they verify the individual and business validity.
Lenders first defense against lost is preventing fraudulent applications which are very prevalent.
They are looking to see that the business and individual are real and authorized to sign on behalf of the company.
This sample of a report shows that it is very similar to the full report a business owner pulls. That said, d & b combines many factors and gives more of a summary including business information, scores, public filings and so on.
Lenders are looking to verify quickly and underwrite applications.
Business Experian offers similar services where lenders or other entities can pull business credit reports, mitigate risk and verify borrowers.
Some lenders use services like credit safe to review a snapshot of all credit reports combined.
You can see there is a very detailed summary page that offers company information, general payment terms, credit limits and exposure. They offer their independent scoring and risk exposure score that lenders can rely on during their underwriting.
By continuing to sort they can see trade payments, risk ratings, legal filings, company information, ownership and so on.
Another feature many of these services offer is an actual underwriting engine that takes your requirements into consideration and spits out a lending decision, approval amount, term and other factors.
You can see that lenders have many great options to review business credit. This can be achieved on a small scale or large scale.
Most creditors pay business credit agencies for automated business credit underwriting. The creditor outlines their criteria; the program builds in the criteria; the automated system spits out a response including the amount and terms based on the risk.
Because of limited regulations anyone can view another businesses credit report, and declines don’t have to site that the business credit application was declined because of the information on the business credit report.
The use of business credit during the underwriting process has increased! As business credit agencies continue to improve their offerings and the validity of their data lenders, use them more and more.
We foresee that this practice of using the business credit within the underwriting process will only increase.
You heard this right, now more than ever business credit is reviewed.
So what does this mean to you? We believe it is time to prepare your business credit now.
Now you are thinking like a lender. Established business credit is a key to your success.
Congratulations! You have completed all 4 Rounds. What does this mean?
- You have formed a solid business foundation
- Established your business credit reports
- Learned to monitor and read your business credit reports
- Built business credit and more
Remember, continue to build your business credit & look for additional learning or advanced tactics to take your business credit to the next level.