The segment introduces the general practice of small business lending of which is mostly automated. This foundation helps business owners prepare for financing.
Let’s start with the basics. What is Small business lending? It is defined as a business that grosses under $10 million per year.
A majority of financing for small businesses is under $100,000.
The typical avenues of lending are the line of credit, loan & business credit card.
Did you know? Most small business financing decisions are automated. Their computer system says Yes or no.
You submit your application to your banker; they enter it into the system, and a couple of days later their computer tells them if you are approved.
You’re likely asking why do lenders use an automated system?
The most popular finance application received is for small business financing under $100,000. Processing and underwriting all of those applications can be time consuming and expensive. Lenders then streamline the process.
By streamlining the process the lender saves money, underwriting is uniform & the process is quick.
This means banks don’t have thousands of lenders making independent finance decisions all over the country. That practice is far too risky. A uniform underwriting process that is centralized allows lenders to stick with uniform lending practices. It also makes it possible for lenders to change their underwriting standards regularly to reflect the market or internal financial needs.
Lenders are mostly banking on volume. Most small businesses statistically fail, but volume diversifies and lowers their risk. Manually filing through applications that may not even be approved is expensive, to keep costs low underwriting is streamlined and automated.
What does this mean to you?
Now that you understand the process is automated you can make sure your application works within their system.
Fill out your application correctly and make sure it is legible. Unless you fill out your application, online your banker will be typing your handwritten application into their system. A zero left out could result in a decline.
Follow up!
If their system initially declines your application ask for a manual review.
Ask questions:
Ask about decline reasons, talk to a manager, and if declined after a manual review ask when you can apply again.
Once approved ask for an increase. During your first communications with a lender, you can ask them to review your file for an increase manually. Over time, you can ask for additional increases. Each lender is different; some allow increases after three months other no sooner than one year.
Be aware that if the system approved you for an amount but their manual review warrants a lower approval or even decline it is possible for them to pull their original offer. This isn’t common but is a risk.
Over time your lender will pull soft inquires to verify that your credit is still in good standing. Be aware that this takes place when you ask for an increase. If your credit has declined your limit could be lowered, or the account closed.
This is why it is important to know that when a personal guarantee is required, you must maintain your personal credit.
Applying for increases will help you build your business credit and receive higher initial approvals in the future.
Sometimes you get automated offers when you open a checking account. Should you take these?
As you know, most lenders automate their small business financing. When you apply for a business checking account lenders are pulling your personal credit. An actual business credit offer can take place at this time. Since the inquiry has already taken place, this is a very good time to add on financing without creating additional inquires. You may also be able to tack on a business loan & credit card all with the same inquiry.
Keep in mind larger financial institutions follow this practice. Make sure with your banker that the offer has already been approved and no further created check will be processed.
What about mail offers? Business owners know that they receive offers in the mail regularly. Are these a good option?
Realize that they aren’t necessarily pre-approved. Depending on the credit card offer most give you no better chance of getting approved. It is important to select the lenders carefully you apply with to maximize the use of your personal credit inquires.
This concludes this segment. Now you are thinking like a lender.
Let’s start with the basics. What is Small business lending? It is defined as a business that grosses under $10 million per year.
A majority of financing for small businesses is under $100,000.
The typical avenues of lending are the line of credit, loan & business credit card.
Did you know? Most small business financing decisions are automated. Their computer system says Yes or no.
You submit your application to your banker; they enter it into the system, and a couple of days later their computer tells them if you are approved.
You’re likely asking why do lenders use an automated system?
The most popular finance application received is for small business financing under $100,000. Processing and underwriting all of those applications can be time consuming and expensive. Lenders then streamline the process.
By streamlining the process the lender saves money, underwriting is uniform & the process is quick.
This means banks don’t have thousands of lenders making independent finance decisions all over the country. That practice is far too risky. A uniform underwriting process that is centralized allows lenders to stick with uniform lending practices. It also makes it possible for lenders to change their underwriting standards regularly to reflect the market or internal financial needs.
Lenders are mostly banking on volume. Most small businesses statistically fail, but volume diversifies and lowers their risk. Manually filing through applications that may not even be approved is expensive, to keep costs low underwriting is streamlined and automated.
What does this mean to you?
Now that you understand the process is automated you can make sure your application works within their system.
Fill out your application correctly and make sure it is legible. Unless you fill out your application, online your banker will be typing your handwritten application into their system. A zero left out could result in a decline.
Follow up!
If their system initially declines your application ask for a manual review.
Ask questions:
Ask about decline reasons, talk to a manager, and if declined after a manual review ask when you can apply again.
Once approved ask for an increase. During your first communications with a lender, you can ask them to review your file for an increase manually. Over time, you can ask for additional increases. Each lender is different; some allow increases after three months other no sooner than one year.
Be aware that if the system approved you for an amount but their manual review warrants a lower approval or even decline it is possible for them to pull their original offer. This isn’t common but is a risk.
Over time your lender will pull soft inquires to verify that your credit is still in good standing. Be aware that this takes place when you ask for an increase. If your credit has declined your limit could be lowered, or the account closed.
This is why it is important to know that when a personal guarantee is required, you must maintain your personal credit.
Applying for increases will help you build your business credit and receive higher initial approvals in the future.
Sometimes you get automated offers when you open a checking account. Should you take these?
As you know, most lenders automate their small business financing. When you apply for a business checking account lenders are pulling your personal credit. An actual business credit offer can take place at this time. Since the inquiry has already taken place, this is a very good time to add on financing without creating additional inquires. You may also be able to tack on a business loan & credit card all with the same inquiry.
Keep in mind larger financial institutions follow this practice. Make sure with your banker that the offer has already been approved and no further created check will be processed.
What about mail offers? Business owners know that they receive offers in the mail regularly. Are these a good option?
Realize that they aren’t necessarily pre-approved. Depending on the credit card offer most give you no better chance of getting approved. It is important to select the lenders carefully you apply with to maximize the use of your personal credit inquires.
This concludes this segment. Now you are thinking like a lender.
