In the first two parts of this series, I talked about how the banking environment has changed for the small business owner—and not for the better. If banking as we used to know it is in fact gone, what do we do if we absolutely still have to get financing? The answer: We find the product that we believe will work, complete our due diligence and then patiently endure the trial affectionately referred to as “underwriting.” Although the process is known as underwriting, you will likely never see, meet or talk with the underwriter. Through some form of middleman—who has also likely never seen the mysterious, wizardly underwriter—you will repeatedly hear phrases such as “the underwriter is requesting this.”
In my creative mind, the underwriter takes the form of a mythological beast whose lair is in the bank’s basement, and periodically its minion throws down raw meat and K-1’s for it to devour. Back in the real world, I probably get five requests a week from loan officers wanting documents on my clients—all to please the underwriter of Oz.
Below I’ve listed four quick and dirty tips to consider before applying for anything and agreeing to endure the underwriting process:
1. Know Your Picture Before you Apply
As a small business owner, you will most likely be required to sign a personal guarantee. Therefore, your personal credit score and not just your company’s score prove very important. We all know that late payments, bankruptcies and foreclosures wreak havoc on our credit reports. But beware; inquiries can be just as toxic, as they all show on your credit report when someone does a “hard pull” of your credit report. Most lenders will pull credit first and ask questions later. As a proactive measure, pull your own credit before applying so that you know what is out there. Pulling your own credit as a “soft” pull will not hurt your credit score.
2. Don’t Waste Your Time Applying for Something You’re not Going to Get or Don’t Want
Ask questions up front. Most banks will offer up their general ranges of terms. Don’t be lulled into the sales pitch: “we can’t give you personalized terms until we have an approval.” The bank’s unwillingness to give you even a general idea of what to expect is a warning flag. They could pull your credit and then offer you a loan with exorbitant terms you never would have accepted under any circumstances. Play hardball on this; get general guidelines so you know you actually want to proceed.
3. Know Your Ratios – Debt to Income and Credit Card Utilization
As an entrepreneur, you obviously pass the acid test of knowing how to leverage. Your bank is going to want a really low Debt-to-Income Ratio (meaning, how much are your total minimum monthly payments as a percentage of your verifiable income?). This can get complicated if you have volatile income in periods of growth or reinvestment. If your W-2s fluctuate all over the map, you will no doubt spook the underwriter. Also, if you have joint debt with a spouse and are applying for a loan individually, be prepared for questions related to how you cover the debt. If you aren’t having your spouse sign on the dotted line, then you can’t include their income when qualifying. This knocks many prospective borrowers out of the ring in the first round. The other focus is on Credit Card Utilization which is calculated by taking your balance per your credit report and dividing by you credit limit. If your cards are maxed out or have large balances, you have high utilization and you won’t get financing. In short, pay them down before you apply for more debt.
4. Set Up a File with the “Usual Suspects”
Loan packages take time to prepare. They take even more time if you are not organized.
A typical loan package usually includes two to three years of business tax returns, two to three years of personal tax returns, a personal financial statement, business financial statements, bank statements, W-2s (if you are salaried), all of your K-1s, rent rolls for rental properties, lease agreements, a 4506-T to pull your tax return transcripts, 1099s for sole proprietors, and anything else the underwriter can dream up—including your first born.
It takes much less time and effort for the underwriter to ask you for the info than it will take you to put it together. By being organized, you can drastically reduce the time it takes to provide a loan package. Click here to receive a copy of our personal financial statement template to use for giving personal financials to your bank in a jiffy.
I know, I know, all of this sounds dreadfully pessimistic. But, by doing some homework and not desperately applying for loan after loan, you’ll avoid mucking up your credit and spending all of your time putting together lengthy loan packages to no avail.
Once you are ready to move forward with applying, throw your hat in the ring with the underwriters. With the above items under control, you will have a much better chance of getting the financing you need – even in this tough lending environment.