What Are the Bank's Top Concerns When Applying for a Line of Credit?
Bank Concerns with Business Credit Applications
Its been my experience with dealing with many small business owners, that they often put the cart before the horse. They will say, We need to get a business plan in order to get money from the banks! Or they will say, I have saved $10,000 dollars to start my business, why do I need a line of credit?
What they and others dont understand, is that banks have a very specific way of operating and often it does not involve a business plan or how much you have saved. Unbeknownst to most people, the banking system changed back in 1995. In this year, banks sat down with a software actuarial company and came up with a system that judges and scores businesses similar to how consumers are judged: by a credit score. With a credit score, this enabled banks to come up with consistent loans, lines of credit and credit lending regardless of where a business is located. What this also did for the banks, was help make their profits more consistent. Its as if all bank branches can now think with one mind, be it in New York City or Iowa City, Iowa.
How this impacts the business owner is that instead of focusing upon a plan, (even though I believe it is necessary to know where you are going), the business owner should focus upon their personal credit. The banks wants to know they are lending to good reliable people. The best indicator of this is how the business owners keeps their own personal obligations. It is my opinion that a business owner should make sure that they are personally up date with any debt obligations, all licenses for the business has been file and they have taken all of the steps to form the corporation properly. If a business owner has saved a large amount of money, it my opinion, that instead of spending the money on the business, the owner should clear up any tax or lien obligations, catch up on past due bills and take part of the money stick it into a secured CD. With the money in a secured CD, the business owner could then borrow against their own money and build credit under the corporation.
So, before getting that business plan or plopping down a big portion of saved money, get your personal obligations in order. You will appreciate it and we know that the banks will as well.
This article was written by Charles White of Corporate Credit Builders, Portland, Oregon. He is one of the top small business credit specialists in the US with years of experience in consulting small businesses.