As the coronavirus ravages businesses, small business lenders are re-evaluating their underwriting policies, along with reviewing their risk tolerances for those industries that look like they may be hit hardest by the disruption.
Here’s what every business owner needs to know right now — even if your business hasn’t felt the pain of COVID-19 yet. (In fact, those businesses should read even more closely.)
What Are Lenders Looking at Differently Today Than They Did Last Week?
Not all lenders will apply the same formulae to how they evaluate business credit, but you can expect they will want to confirm the following.
We’re seeing four major areas where underwriting criteria are changing rapidly.
- Your Time in Business
Many lenders want to see a longer track record than they previously required. This could mean different things to different lenders. A lender that previously may have required a year in business last week, may want to see 18 months or two years now. You need to know what those requirements are before you apply, so you can focus your efforts on where you’ll have a better chance for success.
- Your Industry
Businesses that may previously have been considered good borrowers may now find themselves on a lender’s restricted list. In other words, they won’t lend to them. Some of those industries we have seen become restricted recently include:
- Gas Stations
- Gyms and Sports Clubs
- Entertainment Businesses—anything that draws a crowd
- Bricks and Mortar Retail
- Night Clubs and Bars
- Wireless Stores
Some on the list might make more sense than others, which can seem maddening. Now more than ever, knowing where to apply and where not to apply is critically important in this ever-evolving business lending environment when you don’t have time to waste applying for financing where the odds are long. If you apply for loans you have no chance of getting, you could risk hard inquiries on your personal credit, which can lower your credit scores and decrease your chances of qualifying for other offers that are a better fit.
- Your Cash Flow
With cash flow taking a major hit in many small businesses, demonstrating sufficient cash flow to successfully service debt is more important than ever. Lenders who may have accepted photocopies of bank statements in the past may require real-time access to your bank records now to confirm your business’ ability to make timely periodic payments.
We’re seeing lenders across the board require more than just past months’ statements, but month-to-date bank statements so they can get a real-time picture of how COVID is impacting your business.
- Your Personal and Business Credit History
As mentioned before, previously acceptable credit profiles may be unacceptable now, meaning it’s more important than ever to know what the credit bureaus are reporting on your personal and business credit history. It’s human nature to impact the things you pay the most attention to. If you don’t know what your personal credit score is today and how the business credit bureaus describe your credit practices, that’s the first place to start—and you should start digging into that information today.
Thank you to our partner Nav for giving us permission to republish their “Applying for a Business Loan Is Changing Due to COVID-19: Here’s What It Means.”