The economic downturn and credit challenges of recent years have caused many banks, particularly larger banks, to tighten lending approvals for certain industries and purposes, such as construction and investment real estate. Lending has become more focused on numbers and analytics to determine a “global” picture of the borrower’s credit obligations.
This approach produces many positive results; however, it does tend to minimize the business owners’ management expertise and knowledge.
“When I first started in banking, it was common for someone to say, ‘When I needed a loan, I would call my bank loan officer and he would tell me to stop in the bank and sign the note,’” says William Schumacher, senior vice president and market leader at Westfield Bank. “It was known as a ‘character’ loan. If the banker knew the borrower was of good character and had a positive payment history with the bank, the loan was approved.”
Today, obtaining credit is a much more complicated process.
Smart Business spoke with Schumacher about what you need to do to put your organization in a better position to borrow.
What’s your initial advice to a business owner about optimizing credit?
Whether you’re a new or existing business, a professional team of advisers is essential. Build your team with professionals who understand your business. Engage an accountant, attorney and banker who can work together and devote the necessary time to satisfy your particular needs.
In fact, in Northeast Ohio, lenders tend to know the successful and reputable accountants and attorneys. When applicants come in with those people at their side, it brings instant credibility.
You also want to seek a banker who is knowledgeable about available local, state and federal programs that may enhance your credit request.
How can an owner establish credit for the business and demonstrate it is a good risk?
First, establish and protect your personal credit. Most loans will require a personal guarantee, which will incorporate your personal credit history into the loan process. If you do not pay personal bills, lenders will assume you will not pay your business bills
It’s also important to build a business credit profile that can be as simple as using the business to secure a car loan/lease or obtain a corporate credit card.
Another piece to developing a positive credit history is paying your vendors within the established terms. A lender may ask your vendors for a credit reference and/or accounts payable aging report that can be used to evaluate your payment history and define your credit risk. Also, public reporting agencies gather this type of information on companies, which banks utilize as a resource to determine credit worthiness.
Does the type of business structure affect the building of business credit?
The best structures for building business credit are the ones that separate you from your business, such as a C corporation, an S corporation or a limited liability company. Each structure type has unique differences and possible benefits. Your professional advisers can help you understand and determine which structure is the best fit for you and your business.
What do business owners need to know about the types of loans available?
Borrowers need to understand their lending needs, what loan type is most appropriate and to ensure the available collateral matches the type of loan. A knowledgeable lender can help you explore the different types of credit facilities to determine if you need a short-term working capital line of credit or a longer repayment period provided by a term loan. For instance, you wouldn’t use a line of credit to buy equipment — for that you would use a term loan that would be paid back over a longer period of time. Communicate, develop a relationship, and keep your lender apprised of your success and continuing needs. That will allow him or her to better assist you in making the correct decisions for your business.
Optimizing business credit is multi-layered. You need to pay your bills and vendors on time, create the right business structure, collaborate with strong advisers and build a relationship with your banker.