Your Business’ Credit:
Your Personal Credit:
Your personal credit record can be a flag for a loan to your business. If you’re having trouble making payments on your own debts—late car payments, mortgage payments, student loans or credit cards—then lenders may fear that you might allow your business loans to default before your personal loans. Personal credit scores below 680 are considered subprime, and may causes problems for your business funding.
Depending on the type of financing, lenders and funding providers may appraise the value of your collateral in different ways. Conventional lenders can make judgments about the value of your business and its assets based on the present value of its current and future cash flow. Hard money lenders are far more interested in the resale value of your property, and typically lend at a lower loan-to-value rate than conventional lenders.
Loan-to-Value (LTV) Ratio:
LTV Ratio is the amount your business plans to borrow, divided by the value of the asset you plan to purchase. If you’re buying property, or a business, then that value is used in the denominator. Most conventional lenders will require a loan to capital ratio under 60 to 70 percent. SBA loans allow for much higher values, up to 100 percent.
This is a similar consideration to collateral. Lenders want to know that the borrower has “skin in the game,” and that their fortunes will rise or fall depending on the success of the business.
Cash flow is the most common measure, and one of the stronger items for consideration when applying for funding. Put simply, a lender wants to know that you’ll be making more money with a loan than without it and have the ability to repay your obligations. Your cash flow statement will also validate your claims on the use of funds, whether it is to invest additional capital in your business or cover operating expenses.
Debt Coverage Ratio (DCR):
The DCR is Net Operating Income divided by your annual loan payment, and represents the amount of money you can reasonably expect to afford to pay on business loans. Depending on the lender, DCR can be more important than your loan-to-value. Most lenders are looking for a DCR of 1.2 or better, which is to say, operating income at least 20 percent greater than your total debt burden.
Normally, shopping around widely for a good loan makes perfect sense. Not so for business loans. Potential borrowers have inundated lenders with competitive offerings. When a lender does a credit check on an application, that lender can see a record of all the other credit checks that other lenders have performed, regardless of whether a loan was approved or denied. Lenders tell us that seeing multiple credit checks by their competitors on an applicant is a red flag and is perceived to be an indication that the client may have been turned down by the other lenders.