Credit Scores for SBA Guarantee Programs

Properly preparing for a commercial loan is critical to your chances of obtaining approval.  After you leave the bank your application will undergo a complete review that will consider both your personal and business credit worthiness. Your personal credit reports and FICO score will be pulled along with business information from Duns and Bradstreet as well as the completeness of your application and business financials.

Before submitting any loan application check your personal credit reports at www.annualcreditreport.com . A FICO of 650 is usually the minimum necessary if the remainder of the application shows a healthy business performance, a score above 675 will certainly improve your chances and may be required in some situations.

Verify business information at Dun and Bradstreet, also known for issuing your business a DUNS number.  Dun and Bradstreet track every business's credit performance and are the data resource used by SBA when reviewing loan guarantee applications.  In particular SBA will check your contact information, length of time as current owner, trade lines payment history, and if any legal actions may be in your history. 

Should a blemish exists on either personal or business records you have the opportunity in your loan application package to offer the lender an explanation. Lenders do not like to be surprised, and might think you are trying to hide information that could negatively affect you application. You will be much better served if you discuss past situations upfront where the lender can advise as to how serious the blemish will be and what corrective actions would mitigate the problem. Additionally, you might be able to take actions to improve your total FICO score and Dun and Bradstreet report before submitting for a loan.

Application review will look very closely at your personal and business financial situation. Use SBA's Personal Financial Statement to help prepare your financial status.  Provide Income tax and financial statements to demonstrate business history and trends. A variety of business financial ratios will be calculated to confirm your ability to pay all bills on time including the loan payments and to compare with peer business performance, consider this your business league win loss record.  

Keep in mind that as the lender completes underwriting often the only data they have is what you provided in writing. Each time there is a missing bit of information the review stops until you provide more information, or the lender decides to deny the application.

Buying a Family Owned Business

It is particularly important that buying a family business be considered as an investment, not a purchase, and certainly not a gift.  Making a good investment is based on homework, understanding exactly what you are investing into, risks and a goal for what you want to get as a return on the investment.  

Easier said than done when the business is owned by a parent and emotional issues start to influence business decisions.    Other family members may have expectations as to what their interest in the business is or should be based on long ago events or implied promises.  What the business is worth may be perceived rather than factual.  Plus many years of who helped when money was tight, or someone was ill and many other family issues can sneak into the conversation.   

Thus, if you are planning to sell your business to family or buy from family these steps may help to make the transition less traumatic and more importantly to be – fair to all concerned. As a starting point the owner should let their retirement intentions be known well in advance along with any expectations from the business and future owners such as the need for a retirement income.  

It is highly recommended that the owner obtain a qualified business appraisal to clear the air as to what the business is actually worth, defusing any misconceptions about what might be a fair purchase price. A business appraisal sets a starting point and lets all those concerned know that if they are not interested at this price the owners may consider the open market.

Consider the financing options. If a retirement income is desired will the sellers carry a contract to finance thus obtaining a long term steady income, or do they need lump sum cash out to pay off other debts?   Encourage anyone who may be interested in buying the business to start getting qualified for financing. I have seen a number of deals canceled when the buyer’s loan application is denied upsetting their dreams of owning the family business.

Review tax and estate planning considerations to avoid surprises and unintended consequences.  You may be best served by doing this several years before the intended sale to avoid capital gains or estate taxes. Moreover if the buyer will need bank financing getting the financials and taxes in shape may improve the banks willingness to make the loan.

Starting early will also enable the buyer to gain more experience running the business. The buyers’ management experience will also be important if bank financing is needed.   It is also possible that the intended buyer may change their mind once they test the demands of management.  Some people will recognize they are much better at performing the business functions and that management is not what they do best.

Finally, put it all in writing this is a business deal and family disputes can start over seemingly minor issues. Get an attorney to prepare a purchase agreement spelling out all the details.

Never Stop Testing Ideas

Operating a business is a series of trial and error experiments products, services, marketing, how you do things are all subject to variables that can be changed to improve the outcome.  Yet I frequently hear a client say, I did that and it did not work, end of discussion.

An important part of making your business better that the competition is discovering how to do your business better than the competition.  When an idea works, it’s obvious and we repeat it. But, when the idea does not work we frequently miss an opportunity to learn why the idea didn’t work, or conversely how to do it better next time.  In some respects we can learn more about our business, customers, products and services because we need to solve a problem, to improve the product or service, as a critical step towards growing the business. 

Learning how to do better will improve your chances of out competing and winning new business opportunity.   Thus, when you try a new idea, product or service analyze the following:

• Was product/service right for this time and place: Technology, fads, even location can influence customer needs. 
• Why was the idea a success or flop? 
• What changes would result in a different outcome?  

Advertising message must fit the correct audience.  Each new generation of consumers is as different as we are for our predecessors. In other words, what I like is not necessarily important to my customers.

Product and service are provided consistently, on time, and meeting or exceeding customer expectations. Complaints are solved quickly.  

Consider new opportunities beyond your normal customer base.  The Internet opens the global market place to any business willing to be seen by new customers, who are looking for the goods and services you are offering.  An order from India, China just might be an opportunity knocking on your door don’t miss that opportunity just because you “tried it once and it didn’t work.” Fix what didn’t work.