Look beyond Credit Scores and Banks for Small Business Loans

March 06, 2012

Lenders use different scoring systems and every scoring system relies on different scales. A credit score -- often referred to as FICO score, named after Fair Isaac & Corporation, the company that created the scoring system -- is a number between 300 and 850.

Most credit scores are above 700. A score over 720 indicates good credit management. By this point, lenders see you as a safe risk putting you in the same category as those with 800.

Yet, a small business with a score in the 750 range went to nine banks and all of them turned down her request for a small business loan.

Finding a Small Business Loan

The owner wanted working capital to grow the business by adding another location. She went the extra step in putting together a binder of financial statements and evidence the restaurant had no debts. The binder included a projection of how much the new location would bring in the first 12 months. It also had a business plan with the number of employees needed and the planned menu.

These banks didn't look at this information. They relied mostly on the credit score, so why didn't they approve the restaurant's loan request with a pristine credit score? That question remains unanswered.

The small business found a local community bank that reviewed the restaurant's business plan, financials and credit score. Unlike national banks, a community bank knows the local climate, which doesn't reflect national trends. Furthermore, it saw the restaurant kept overhead costs low and its affordable prices allowed it to gain more customers who stopped going to expensive restaurants.

Still, it's important to build your business credit score despite this small business needing to use cash flow management and a business plan to get a loan from the community bank. Small businesses should also put together a best- and worst-case scenario for revenue projections and show how they will repay the loan.

The lesson for small businesses is to look beyond national banks for loans. Viable options include community banks, regional banks and private lenders. The other lesson is to create and maintain a with all the important information about your business. This ensures you're ready to answer questions from prospective lenders.

Preparing to Request Financing

Start the binder now, not when you need financing. Besides, it'll be useful information to have and easier to maintain after you've put it together.

Also, prepare to ask questions. Meeting with a lender is a two-way interview. The first lender to willing to give you financing may not be an ideal match. (See this list of questions to ask financing sources.)

Here are some items to include in your binder:

  • Business plan: target market, competitive advantage, growth plans and staffing information.
  • Financials: current and projected.
  • Current customers.
  • Marketing strategy.
  • Management team background and bios.
  • Successes and how the company overcame problems.

By the way, the restaurant continues thriving with its four locations.

What other suggestions do you have preparing for a meeting with a lender?