What is SMB Lending?
SMB lending is small and midsize business lending. This can be through banks, credit unions, online alternative lenders, private lenders, and others. But like every other form of business financing, SMB lending it’s far from a sure thing.
Your business needs money (all businesses do). And you’re ready to sign on the dotted line and take out a loan. But then the verdict comes back – denial! What do you do? And, more importantly, how do you prevent such an issue from cropping up again?
Basic Issues with Loan Denials
Your lender wants to be assured that you can and will pay them back. Essentially, if you don’t have business credit, they are looking for one or more of these three characteristics of you and/or your business:
- Personal Credit (yours or a guarantor’s)
- Cash Flow
It all comes down to fundability
Fundability is your business’s ability to get funding. You can make it harder or easier for your business to get money. A lot of the power is in your hands. So choose wisely.
Build for Fundability
A business starts with no credit profile. Therefore, what’s on an application is all that’s reviewed for approvals, so your application must be very strong. Half of all companies fail in their first 5 years, and 2/3 in the first 10. As a result, new businesses don’t seem fundable to lenders. You can change that.
SMB Lending Deal Killer #1: Your Business Seems to be Too Risky
Many entrepreneurs put the name of their industry in their business name. But this is a mistake that can lead to denials. Keep the name of a high-risk or restricted industry out of your business name. There is nothing underhanded about this – it is above board and honest.
Some restricted industries include:
- oil trading or energy
- finance companies and pawn shops
- ammunition or weapons manufacturing
- bail bonds, check cashing agencies
- political campaigns
- X-rated products or entertainment
If your business name shows you’re in one of these industries you may get a denial.
Fix #1: Keep the Name of a High Risk Industry Out of Your Business Name
Many lenders automatically decline if a business name indicates a high risk industry. But your business doesn’t have to be called Jennifer’s Check Cashing. It can be called simply Jennifer’s. While this won’t guarantee success, at least it will get your business past an initial denial based on your business name containing a red flag.
SMB Lending Deal Killer #2: Records Inconsistency
One of the most common reasons for loan and credit card application denials is the lender can’t easily locate a business online. The business name, address, etc. on your application should be the exact same as what’s listed online and with your Secretary of State. This even means hyphens and abbreviations. Inconsistencies spell fraud to lenders, no matter what your ethics and intentions are.
Fix #2: Keep Your Records Consistent Everywhere
Make sure your business information is exactly the same on corporation papers, licenses, utility statements, and bank statements. Also make sure the business name and all other information is the same on as many online listings you can find. And keep in mind that a full business name should include any recorded DBA filing in use. But consider a DBA a short stop on the way to incorporating.
SMB Lending Deal Killer #3: Issues with Your EIN, SIC and NAICS Codes, Corporate Entity, and Licenses
To get financing or credit for your business you must have a business entity. A corporation or LLC gives you more credibility in many cases. It also helps you reduce your liability. And it separates you from your business. It makes the business a separate legal entity. Make sure your entity is set up in the same state as your business address. Choose your entity at the IRS website.
Fix #3: Settle Your EIN, SIC and NAICS Codes, Corporate Entities, and Licenses
Your corporation must have a Federal Tax ID number (EIN). Just like you have a Social Security Number, your business has an EIN. You use your Tax ID number to open a bank account and to build a business credit profile. Take the time to verify all agencies, banks, and trade credit vendors have your business listed with the same Tax ID number. Also make sure your address with the IRS is the same as listed everywhere else.
The IRS website is where you choose SIC and NAICS codes. Industries are categorized by 2 kinds of codes. SIC (Standard Industrial Classification) and NAICS (North American Industry Classification System) – you chose these codes. Be honest when you choose yours. But there’s no reason to choose the riskiest code if a less risky one might apply.
Fix #3: Get Your Licenses
Make sure you have the proper licensing for your corporation. Make sure the address on your licenses is the same as all other documents. Contact State, County, and City Government offices, see if there are any required licenses and permits to operate your type of business. Being licensed also builds credibility in your business, and that can help you get more customers.
SMB Lending Deal Killer #4: Business Address Issues
Your business address has to be a real brick and mortar building. It must be deliverable physical address. For a retail establishment, this should not be a residential address or a PO Box. Don’t use UPS mailing addresses. Some lenders will not approve and fund unless you meet this criterion.
Fix #4: Take Care of Your Business Address Issues
Lenders check with USPS and places like Google Maps to see if you’re using a residential address. If you are, and yours is a retail business, you could get an immediate decline. For a retail business, do NOT use a residential address on your application! Not even if your company is just you. But you can often use a virtual address. We like Regus, Davinci, and Alliance Virtual Offices. But keep in mind, not every vendor will accept a virtual address.
SMB Lending Deal Killer #5: Not Paying Attention to Business Phone Numbers, and a 411 Listing
Lenders can see an 800 Number or toll-free phone number as a sign of business credibility. Even if you’re a single owner with a residence-based business, a toll-free number provides the perception that you are an even bigger company. It’s incredibly easy and inexpensive to set up a virtual local phone number or a toll free 800 number.
Fix #5: Pay Attention to Business Phone Numbers, and a 411 Listing
A cell or residential phone number as your main business line could get you flagged as un-established – but VOIP is okay. Do not give a personal cell phone or residential phone as the business phone number. Your phone number must be listed with 411 for most credit issuers and lenders to approve you. Check your record to see if you have a listing. Make sure your information is accurate. No record? Then use ListYourself.net to get a listing. Business phone number should be toll-free (800 exchange or comparable).
SMB Lending Deal Killer #6: Non-Professional Website and Email
Lenders will research your corporation on the internet. It is best if they learned everything directly from your corporate website. Not having a company website can severely hurt any chances of getting loans. Use places like TemplateMonster.com and Upwork.com and get a site up cheap and fast.
Fix #6: Set Up a Professional Website and Email
You need a professional website, more than a listing on Yelp. Buy a domain from a place like GoDaddy. Your domain should be your business name, if possible.
You need a company email address for your business. This email must be on the same domain as your website. Use a professional email address like [email protected]. This usually comes with a website domain provider like GoDaddy. It is not just professional it also greatly helps your chances of getting approval from a lender. Do not use AOL, Gmail, or similar kinds of email.
SMB Lending Deal Killer #7: Business Bank Account Carelessness
When first opening up and working with your business bank account, you always need to be looking to the future. That future is bank loans. Set your business up for bank loan approval success. Being careful with your business bank account is the key.
Fix #7: Take Care of Your Business Bank Account
Your business banking history is vital! It lead directly to your success, or failure is securing larger business loans. The longer your business banking history, the better your borrowing potential is.
You must have a bank account devoted strictly to your business. This helps at tax time. The IRS does not want you commingling funds. Make accounting easier and reduce the risk of audit. Keep personal and business funds separate. The simplest and best way to do this is with a separate account.
Open Your Business Bank Account ASAP
The date you open your business bank account, is the day that lenders consider your business to have started. So if you incorporated your business 10 years ago, but just opened the business bank account yesterday, then your business started yesterday.
Keep a Great Bank Ratings with Your Business Bank Account
Your bank rates you on your balances and more. Higher rated businesses get loans, lower rated businesses do not. When applying for a bank loan, maintain $10,000 on average in your bank account for at least 3 months.
A $10,000 average balance for 3 or more months gives you what’s called a Low-5 rating. With a Low 5 rating, most conventional banks see your corporation as fundable. If you don’t have a Low-5, you can still get corporate credit and alternative loans, but you would not be able to get a conventional loan. Bank ratings measure how responsible the account owner is with funds.
You can also help your business’s bank rating with:
- Using more bank products (like certificates of deposit)
- Consistent deposits
- Rising balances
SMB Lending Deal Killer #8: Not Getting Your Personal Financial House in Order
Personal credit quality is often helpful for getting funding. So if personal credit is not in order, get it straightened out and improve it. Don’t neglect this piece.
Fix #8: Get Your Personal Financial House in Order
For a business loan at a conventional bank you need good personal, business, and bank credit. While you want to build good business credit, having good personal credit can get you started. Good personal credit will open doors, and it will open them earlier.
Personal credit scores are based on:
- Payment history – so pay your bills on time and pay down your balances
- Utilization/Amounts Owed – so don’t max out your cards
- Credit Mix – so carry more than one type of credit card
- Length of Credit History/New Credit – so don’t close older accounts, and don’t constantly shop for new cards
SMB Lending Deal Killer #9: No Business Credit
Your business has its own credit, just like you do. It’s a measure of how well your business can pay its bills. But without building that credit, your scores will be low/nonexistent. This will kill any business loan deal.
Fix #9: Set Up for Business Credit and Get Your Business Identification Numbers
Go to D&B’s website and look for your business. Can’t find it? Then get a free D-U-N-S number. Your D-U-N-S plus 3 payment experiences gets you a PAYDEX score. Once you are in D&B’s system, search Equifax and Experian’s sites for your business. You can do so via Credit Suite.
Another ID number is the BIN (Business Identification Number) number. Experian’s BizSource assigns a BIN. A business must be listed with CRAs to establish business credit. You can also be denied funding if you don’t have a credit score or a low credit score with D&B, Experian, or Equifax.
SMB Lending Deal Killer #10: Poor Business Credit
It’s not enough to just get your ID numbers. You need to actively build business credit – it doesn’t just happen. But you can’t start off with Visa and Mastercard. Instead, you can get started at vendors like Uline.
Fix #10: Build Business Credit
Get the most favorable funding by paying all bills on time. This gets you:
- A PAYDEX score of 80
- Equifax Credit Risk Score of 90 or better
- And a good FICO SBSS score – it is driven (in part) by on-time payments and business credit history
- For Experian, historical behavior (payment history) = 5-10% of total score
Your business’s payment performance matters more than anything else.
Fix #10: Start Business Credit Monitoring
Keep your business credit scores high and your reports accurate with credit monitoring. We offer it for less. Check all listings with the business CRAs for accuracy and completeness. You want to be sure any info they have is accurate. See creditsuite.com/reports.
Preventable Lending Deal Killers: Takeaways
You can help avert these lending deal killers in 10 separate ways. Setting up your business properly, with a good name and professional address, phone, etc. will help. So will getting a proper EIN, SIC and NAICS codes, and all required licensing. Responsibly handle your bank account and business and personal credit, too. Monitoring helps you keep your business credit scores high, and we offer it for less.