By Vanita Lee-Tatum
During my 11-year career in Small Business Banking I found joy in helping clients gain access to the capital needed to build, grow, and sustain their business ventures. Over time I served a diverse group of clientele with revenues ranging from $0 to $10 million, managed deposit relationships up to $20 million, and facilitated small business loan requests up to $5 million.
As a banker it was important to understand the complexities of my clients’ needs in order to help them achieve their goals. As a business owner it is equally important for you to understand how a lender views your business in order to increase chances of a loan approval. In this article I’ll provide insights and share tips for small business owners and entrepreneurs to enhance eligibility.
Nearly half of small businesses in the United States are owned by women. There’s tremendous opportunity for growth, so it’s important to understand how lenders evaluate risk in terms of industry. Women have higher concentrations of ownership in service-related fields, which is a plus when we consider those that are traditionally finance friendly!
I have personally encountered businesses in every category listed below. Sectors with higher barriers to entry tend to be preferred by lenders, while others become limited or restricted based on valuation or regulation.
· Medical Professionals
· Business & Legal Services
· Retail Stores
· Assisted Living Facilities
· Car Washes
· Auto Repair/Dealerships.
· Financing Companies
· Insurance Companies
· Real Estate Investment Firms
· Non-Profit Organizations
· Religious Organizations
· Adult Entertainment
· Check Cashing/Money Services Business
· Cannabis (this is changing)
Eligibility Guidelines for Small Business Lending
Now that you have an idea of the types of industries that are more favorable for small business lending, let’s explore common eligibility guidelines. I absolutely love going over this with clients because it increases awareness and inspires business owners to create financial efficiency.
Prior to the 2008 financial crisis not all banks required a personal guarantee for small business lending. If banks are willing to bet on you with a loan approval, they need to know you are willing to bet on yourself by making a personal guarantee to repay the facility. From their perspective they want clients to have ̈skin in the game.” Aside from industry, your personal credit rating is the first factor in determining eligibility.
Most lenders refer to Duns and Bradsheet for business credit history. I ́ve always encouraged clients in the start-up phase to utilize a small business credit card to cover short term expenses while establishing credit history for their business. When it's time to apply for a small business loan, the bank will view the card relationship to understand more about your utilization and repayment practices. Establishing a small business credit card will help you build that history.
Length of Time in Business
Banks typically require two-to-three years in business; however, there are alternative lenders such as Community Development Financial Institutions (CDFI) and microlenders that may only require one year in business. As a general rule, be prepared to provide a minimum of two years business and personal tax returns to your lender.
You’ve likely heard the saying, “Cash is King.” Well, cash flow is Queen! No matter the size, maintaining a consistent and healthy cash flow is essential to launch, sustain or grow a small business. Lenders will evaluate your financial statements (i.e., personal and business tax returns, balance sheet, P&L, 90-day receivables, etc.) to determine profitability. Talk with your lender to understand more about their required debt servicing/cash flow ratio. The numbers are revealing – make it a best practice to keep your books in order as they articulate your financial story.
Collateralized loans are more appetizing for banks as they reduce the risk associated with lending. If there is a default, the lender will be in first position to take ownership of the asset. The most common form of collateral is real estate; however, there are many others which include cash reserves (i.e., money in the bank), business equipment, vehicles, accounts receivable, and in some cases, life insurance is accepted. Talk with your lender to learn more about their guidelines and determine which option is most viable for your business.
Vanita Lee-Tatum is a former Small Business Banking VP turned Entrepreneur. Her reputation as a well-known trusted advisor and advocate for small business led her to build a highly successful career through the ranks of top multinational financial institutions over the course of 11-years. Continuing to do the work that brings joy, Vanita is passionate about her current role as an independent Small Business Strategist, specializing in helping organizations and entrepreneurs optimize finances and achieve growth.