Tips for Obtaining Financing – Despite Challenged Credit

By:  Doug Houlahan, EVP, Maxim Commercial Capital

Did your bank turn down the credit application for your small or mid-sized business because your personal credit (FICO) score is less than stellar?  You aren’t alone!  Entrepreneurs bootstrapping their businesses as well as seasoned business owners experiencing hiccups have let personal bills take a backseat in order keep their businesses afloat, compromising their credit scores.

Don’t despair!  While your FICO score is a major factor for banks and other traditional lenders, alternative capital sources exist for well-prepared business owners.  The following tips will put on you the path to a new business loan.

  1. KNOW YOUR NUMBERS: Knowing your numbers is not limited to annual revenue, income, profit margins and debt service.  It also encompasses the benefits the potential financing will provide to your business, or “Economic Benefit.”  Economic Benefit is the return on investment (ROI) generated by the financing through:  increased revenues, incremental profits, improved cash flows, etc.  A well-prepared Economic Benefit justification can go a long way in supporting a loan’s approval.  Rule of thumb:  To be compelling, the Economic Benefit should be a multiple of the cost of the financing.  Knowing your numbers also allows you to confidently decide whether or not the proposed financing terms make sense for you and your business.
  2. CONSIDER THE THREE C’s: Beyond your FICO score, the other important factors considered by lenders in the credit approval process are the 3-C’s:   Capacity, Character and Collateral.
    • Capacity is the ability to pay your bills. Strong cash flow and lower debt loads are clear indicators that you are a good business operator, regardless of a challenged FICO score.  Rule of thumb:  Up-to-date and well-presented financial statements are the best tools to illustrate your capacity to service the proposed debt.  A few extra dollars spent on a bookkeeper every month to polish up those numbers is a worthwhile investment.
    • Character evaluation has changed significantly over the past few years thanks to the Internet. Many lenders search online to attempt to assess a prospective borrower’s character and likelihood of paying.  Social Media sites like LinkedIn, Facebook, Twitter and Instagram are reviewed to evaluate an individual’s public persona.  Many assumptions are made from these profiles.  Rule of thumb:  Remember that EVERYTHING you post online is a permanent record.  Be aware of what your public image communicates about your character.
    • Collateral is the ultimate enhancement lenders can hang their hats on. When a business fails to operate profitably and cash is tight, excess collateral coverage can increase a lender’s willingness to extend credit since its investment can be recovered by liquidating the collateral.  Rule of thumb:  Acceptable collateral extends beyond the obvious business assets.  Consider your personal assets including homes, investment properties and other liquid assets as collateral for your desired financing.
  1. HIRE A BROKER FOR CREATIVE SOLUTIONS: Sophisticated brokers may source multiple credit facilities from specialty lenders to fulfill your liquidity needs.  Accounts receivable financing, equipment loans, sale and leaseback transactions, inventory financing and even real estate mortgages can be combined to provide you with the best overall financing package.  A Broker can also save you countless hours in tracking down the right lenders and putting together the required loan packages, allowing you to stay focused on running your business.  Rule of thumb:  Interview multiple brokers to find one with whom you have chemistry, and have your broker coach you throughout the process.
  1. REMAIN OPEN-MINDED: Payment options have evolved thanks to technology, reducing repayment risk for lenders and creating more options for borrowers.  Instead of debiting interest and principal payments monthly, lenders easily can structure weekly, and even daily, loan payment programs; accelerated or front-loaded payments; seasonal payments; lock box arrangements; and contract financing.  Rule of thumb:  Make sure you thoroughly understand your obligations under a proposed loan agreement.  Have your broker, controller or accountant help you build cash flow projections to demonstrate you have sufficient cushion to remain in compliance with your loan agreement(s) in the event of an unforeseen hiccup.

THE BOTTOM LINE

You don’t need multiple lenders wanting your business to achieve your liquidity goals.  You just need the right capital structure from the right lender(s).  With that comes the flexibility you need to seize opportunities to profitably grow your business – resulting in a higher credit score in the future.