While finding funding for your business is a long, involved process, there are some common “red flags” that underwriters recognize and monitor that could have a dramatic impact on the likelihood of success in your search. Here are some of the most common red flags underwriters will be looking for, which you should be aware of:
- Over-borrowing or under-borrowing
- A recent change in business ownership
- A weak or inexperienced management team
- Aggressive tax management on financial statements
- Multiple business incorporations by the same owner in different states
- No fixed address for the business
- A weak or nonexistent business plan
- A lack of references from suppliers, clients, etc.
- An effective tax rate far below the industry standard
- Improper or aggressive capitalization of expenses
- Lying to your broker or lender about your credit score before a credit check
- Writing off personal expenses as business expenses
- Selling off property or equipment without adequate explanation
- Allowing property or equipment to become fully depreciated without capital expenditures to replace the losses
- An unexplained slowdown in your company’s cash cycle or operating cycle.
If you know that one of these red flags will come up for you when you start the application process, be proactive. Provide written documentation, explanations, and supporting records, so that the lender can understand the circumstances surrounding the red flag.
The best question to ask when working with a potential funding source is “Do you work with companies that <insert your red flag(s) here>?” If the answer is “No,” politely end the conversation and move on.
Many times, the response will be “It depends,” followed by some qualifying criteria. In that case you can try to see if you can work something out.
Some may ask why “under-borrowing” would be considered a red flag. The simple answer is that in this situation, your business will have little to no credit history. Lenders use that history to help judge your commitment to pay your debts in a timely manner.
If you have multiple red flags associated with your business, be prepared to shop around and find a provider that works with businesses similar to yours. There are funding sources that work with companies with a vast array of financial challenges. Use the Internet in your research, but be wary of deals that look too good to be true.
Here’s How to Handle Bad Publicity
5 Key Questions to Ask an Attorney
Do These 4 Things to Improve Business Communication