Maybe you're like many small business owners who are once again feeling the anxiety and nerves associated with sitting before a banker and asking questions about your money. As one client described it while trying to get the last round of PPP: "I feel like I'm totally at their ‘mercy’ and nothing I give them is good enough!!!"
This anxiety often comes from "winging it" and "hoping" you get approved, rather than being totally aware of how you look on paper - even if it's not great. The truth is, there actually is a "science" to getting approved, it's all based on what I call your money "mix" - or your entire money picture.
I briefly talk about this money "mix" in Episode #2 of our Podcast Relaunch called "Financial Diet."
- :35 The Financial "Diet" - even if it's unhealthy
- 1:25 Credit, good debt vs. bad debt
- 2:05 Assets, Investments, & Accounting
- 5:26 The mix comes together with Taxes - it doesn’t have to be painful!
- 6:23 Cleaning up our "financial diet"
The Basics Of Getting To "YES"
While it's true that disaster loan qualification is typically based more on the disaster itself and demonstrated losses, small business owners who plan to stay in business for the long term need to understand what lenders are looking for when an application comes in for funding.
1. Your credit profile and history
Lenders want to see a record of you borrowing and paying money back on time. And yes, amounts of credit matter as well, because it shows how much you've responsibly handled. The problem with this is an estimated 90% of credit reports have errors. Is yours one of them? If so, you could be costing yourself the next loan.
2. How much credit you have "available"
Size does matter when it comes to loan approval, but in the case of credit cards and lines of credit, the name of the game is "available credit," meaning you're not "maxed out," or using all of the credit you have.
If lenders feel you are using credit to make ends meet, understandably they will be nervous about the possibility that there may not be "extra" to pay the loan back.
3. Your money and other valuables
This may be a bit counterintuitive, because of course you're applying for a loan because you need cash right? Money in the bank or cash "on hand" means you do have money left over and credit is a strategic move or a "choice." Little or no cash of your own means you don't have much skin in the game, and a bit risky from a lender's point of view.
When it comes to other valuables (called assets), they may be valuable enough to take the place of the cash (called collateral). Collateral can sometimes make it easier to get to the "yes," because if it comes down to it, it's value can be converted to cash to pay the loan back.
4. Do you have financial statements?
Financial statements matter because they're going to show a more complete picture of your money and answer a lot of a lender's questions for you, things like:
- do you have other debts or unpaid taxes?
- if you have a business is it profitable or just bringing in cash?
- is that cash really coming from sales or somewhere else?
Even individuals with no business at all may be asked for a personal financial statement which paints a similar story but on the personal side - but can strengthen loan chances because these will include real estate, equity and insurance cash values and other investments.
5. Do the tax returns "add up?"
Yep, this is a doozy and I saved it for last because here's where you could be doing everything above correctly and those taxes "break" the deal. The biggest deal-breakers I see are:
- taxes not filed at all
- tax returns showing negative or too little income (how are you going to pay a loan back if you make no money?)
- tax returns showing different income than what the "source documents" reflect (the financials listed in #4)
Your MoneyRx Action Steps
1. If you know you have issues with some of what you read here, Book a Strategy Session so we can put together a custom plan for you. The up front "Money Milestone" session fee ($75) applies to any future done-for-you services.
2. If you would like a FREE credit consultation with one of our partners, Contact Us for a referral.
3. Check out the Debt Download mentioned in the podcast. Remember, knowing your own story before a lender asks about it can boost your confidence.
Check the blog often for any updates and I hope you'll subscribe to the podcast. If this helped you at all, let us know in the comments below! It just helps us know what content is really useful and that we should keep sharing in future posts.
Thanks for dropping by! 😀
Make it a great day (especially for YOUR MONEY), and I'll see you in the next post!