Whether you have applied for a small-business loan before or are new to the process, it can be frustrating and difficult to navigate. In the Federal Reserve’s 2023 Small-Business Credit Survey, over half of business owners who felt discouraged from applying for funding cited lender requirements as the reason. Difficulty with the application process was one of the major challenges borrowers faced, especially with large banks, next to high interest rates.
To provide insight into the process, we interviewed two small-business lending professionals with almost four decades of combined experience working with small businesses. They discussed the funding process, what lenders look for, and how business owners can approach lenders.
Responses have been edited for length and clarity. Learn more about each lender after the questions.
What components of a business’s financials do lenders look at?
Alexis Dishman (small business chief lending officer at Community Reinvestment Fund): Each small-business lender will vary, but many will look at the last several years of revenue to understand how the business has performed. They also examine net income, losses, and growth projections.
How does underwriting for business loans differ from personal loans?
Samuel Fuentes (loan officer at InterBank): Business loans use a debt service coverage ratio (DSCR) calculated annually to assess cash flow, while consumer loans use a debt-to-income ratio (DTI) calculated monthly.
Why do lenders look at personal tax returns or income for a business loan?
Alexis Dishman: Underwriters often review personal tax returns to ensure income from the business isn’t solely supporting the borrower’s lifestyle beyond their salary.
Should businesses expect to sign a personal guarantee?
Alexis Dishman: Personal guarantees are common with small-business loans to show the owner’s commitment to the business’s success.
What can small-business owners do to prepare themselves to apply for funding?
Samuel Fuentes: Business owners should communicate with their lender and accountant about their borrowing plans and seek assistance to understand lender requirements.
What are some common mistakes that applicants make?
Alexis Dishman: One common mistake is not being transparent about past challenges, such as credit blemishes or business downturns.
What are some common reasons loan applications get denied?
Alexis Dishman: Reasons for denial may include insufficient operating cash flow, lack of collateral, or incomplete applications.
What do you recommend as next steps for applicants who are denied?
Alexis Dishman: If denied, applicants should meet with the lender to understand the reasons and seek assistance in making necessary changes for future applications.
What’s your advice for a business that doesn’t meet the criteria but still needs funding?
Alexis Dishman: Research other lenders like community development financial institutions (CDFIs) or crowdfunding that may align better with the business profile.
For more information about the lenders and their backgrounds, please refer to the original article on NerdWallet.
