This is the second of a two-part post that answers your small business credit underwriting answers. I recently caught up with Mike O’Connell, Direct Capital’s Credit Manager, to have him answer questions asked by our blog readers and Twitter followers. You can learn more about Mike in the first post.
Dave: The media has been full of news about how difficult it is to get small business financing, from your perspective why is it more difficult to get financing today than it was 2 years ago?
Mike: Financing has been more difficult to obtain over the last 12 months than the earlier part of 2008. Lenders have reacted to the collapse of the housing market, unemployment rates, increasing loan defaults, etc. by adjusting their practices. The natural lender response under these conditions is to tighten up the credit window. As a result, business owners looking to expand or replace their equipment are being asked for additional information in order to determine credit worthiness. This is a balancing of the lenders and obligors looking for financing, assessing the appropriate risk by industry and credit. While some banks have tightened up substantially on lending, Direct Capital has remained consistent with its lending practices and will continue to offer small businesses the opportunity to maintain and build their companies.
Dave: What kinds of things are an absolute must for business owners to do to set themselves up with the best possible chances for credit approval?
Mike: When looking for financing for one’s business, it is critical to convey to the lending institution the need for the asset; additionally what this equipment will allow you as a business owner to accomplish. The 5 W’s truly fit into this area: who, what, when, where & why.
Who will be getting the financing? One would think an obvious answer, but often times the collateral will be used by a third party or another business; very important details to know as a lending institution.
What will it be used for? A bulldozer for example moves dirt, pretty straightforward, but the real question here is what will it allow our potential lessee to do? Complete jobs more quickly perhaps.
When will the need for the new equipment be? Is it a long term need or only a short term.
Where will the financed equipment be located? Headquarters, third party location maybe?
And lastly why – what is the core reason for the equipment?
Dave: If a small business owner doesn’t get approved, are there any options at that point?
Mike: If initially a business owner is not approved for financing, there are several steps that can be taken in order to be proactive with one’s lending potential in the future.
First, be absolutely certain that all accounts or tradelines are handled as agreed with personal and business debt obligations. Time is the best asset to re-establishing credit and showing repeated timely payments.
Second, it may be worth your time to re-evaluate your immediate needs. Maybe you or your business applied for financing on a piece of collateral that required $150,000 in lending, however you were turned down. Is there an option to find a used or less expensive piece? Where you or you business may not have qualified for over $100,000 in financing, maybe you are able to secure $50,000 to $75,000.
Lastly, be sure to know what is being reported on your personal credit report. Information unknown to you as a business owner can cost you money. If there is an erroneous collection account reporting on your credit report, and you are unaware of it – then immediate steps should be taken to contact the credit reporting agencies to correct any and all misinformation.
If you have other questions you would like answered, leave them in the comments below.
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