The Current Business Financing Marketplace
Today’s credit marketplace makes it absolutely imperative that business owners take pro-active steps prior to submitting an application for financing. If you have been through the process of asking for business financing, you’ve probably experienced that helpless feeling of not really knowing what the outcome will be, even if you are the perfect borrower, until the very end of the process. In today’s credit market, even the near perfect borrower is floundering their way through the lending process. We’ve found it more important than ever for business owners take action to set themselves up in the best possible light to an underwriter before applying for that equipment financing, business loan, or any kind of business financing.
The Three C’s, or is it Four or Five?
A major challenge that business owners have is not knowing exactly what to do to look good in the underwriter’s eyes. Many business owners will base their actions on past experience with their bank, however, in most cases the bank doesn’t fill you in on why you were denied financing, or why you are getting the rate you were given. You may have heard of the three C’s of underwriting: Credit, Capacity and Collateral, which is a common explanation of the criteria used to underwrite financing requests (though some underwriters say they use four C’s and five C’s). This doesn’t provide any guidance on how to position yourself and your business for financing.
Four Must-Do Steps Before Seeking Business Financing
- Start with the end in mind: Ask yourself what will be the return on your investment – does the money saved or additional revenue from the investment outweigh the cost? Make sure you measure all applicable factors. Besides the direct revenue increase or cost savings there may be indirect factors that may affect the net cost of the investment. One important savings to make sure you know about is Section 179. We’ve prepared a website to answer all of your questions in this area at Section179.info.
- Review your personal credit: Your personal credit score factors into almost every financial transaction made. Some you may know about (business financing, auto financing, mortgages) but others you may not (car insurance, employment, property rental decisions). There are three major credit bureaus (Experian, Equifax and Transunion) – check each one to insure everything on your personal credit is accurate if your scores aren’t where they need to be.
- Review your business credit: The primary business credit reporting organization is Dun & Bradstreet (though Experian and Equifax also have business credit reports). For business loans and equipment leasing, this source is used frequently. The first step is to make sure you have a listing with Dun & Bradstreet – some newer and smaller businesses aren’t registered with Dun & Bradstreet at all. Once a business is registered, Dun & Bradstreet collects information such as year started, revenues, SIC code and a Paydex Score (a system developed by Dun & Bradstreet). Inaccurate information with this source can hinder business financing efforts.
- Understand the market: To help understand what you’ve learned from your business and personal credit reports, review our past webinar -“Insider’s Guide to Personal and Business Credit”. Also, understanding the borrowing activity in your industry and your region can not only help you understand the current financing landscape, but it also empowers you to adjust and target your customer base as you begin to understand trends in your area month over month.