What Financial Institutions look for in your Business Credit Application

Recently, I have seen a lot of hate on Banks. And truth be told, I haven’t always loved them either. When I was a Banker, I cringed anytime someone asked what I did because let’s be real, a Google search about top hated professions will likely have a Banker on that list.

But, whether we love them or hate them, financial institutions are a reality in our life so it would be better to understand how they work unless you keep all of your money stashed under your mattress. If you do, I really hope that your house doesn’t ever start on fire.

There are options within financial institutions. You can choose to bank with a large bank or a smaller local credit union. Each option has positives and negatives, but remember that you as a consumer get to choose where you put your money or whom you do business with. 

While the rules of credit are the same, different institutions navigate those rules differently. And bankers are people so two different bankers and two different institutions may see your credit ask significantly different so get second or third opinions.

There are private lenders as well. Keep in mind that those private lenders are accepting more risk so they will require a larger return.

I suggest learning more about Environmental, Social and Corporate Governance and be picky about which companies you do business with including your Bank. I started my career in the hospitality industry and early on was told that our clients vote with their dollars and we want them voting for us. That has stuck with me as a consumer and within my professional career and I love the fact that ESG Investing is growing in importance! I am extremely picky who gets my hard-earned dollars!

Unfortunately, 90% of start-ups fail and as much as you believe in your dream and your business idea that is a pretty high failure rate for a Bank to provide capital right away. It is likely that you will need to finance the beginning stages of your business on your own.

That being said there are Government programs such as the Canada Small Business Financing Program to help start-ups buy assets. Banks are aware of these programs and will finance you under the same should you qualify.

 With that said, let’s look at the 5 C’s of Credit and how they relate to you and your small business and how the Bank will look at you.

Character - How have you handled debt in the past? Do you have a large number of collections on your bureau, late payments? Or have you historically paid your debt as agreed?

Capacity - With start-ups, this is one of the trickiest to demonstrate as you may have quit your previous job to start your business. Have you created a business plan with projections? It’s hard to tell the future but projections can be realistic or outlandish. And in my Banking days, I saw both. Guess which one, I put forward to risk! Are you still employed, and can your personal income cover your personal expenses and this debt should it need to? Can your spouse’s income assist?

Capital – How much are you investing in the business? If your business costs $100 and you are asking the bank for $150 because you need help with operating costs too vs you are asking for $20 as you have the rest covered? How much skin are you putting in the game? Do you have additional assets that could be liquidated to cover the loan if the business was to fail?

Conditions – What is the overall state of the economy? What kind of business are you starting? Do you need the money to buy assets or to keep the power on? Can you pay the debt back in 2 years vs 20 years? For example, if you wanted to open a video store today, the bank would likely not lend to that with Netflix, Disney + and Prime as competitors.

Collateral – What can the Bank sell to recover their debt if the loan isn’t repaid? Do you have savings, a home, or assets within the Business itself?

I started my Banking career in Small Business and I can honestly say that nothing made me smile more than seeing an Entrepreneur’s dream and helping them create it. I loved touring their business and learning how they came up with the concept and helping it grow. I didn’t make the decision on whether the Bank would lend to them or not. But, I WAS the first gatekeeper and if the ask didn’t make sense based on the rules of the Bank, I wouldn’t send it to risk. It was a fine balance as I wanted some declines from Risk as there were times when pushing the envelope made sense and if everything that I sent to Risk was approved, I wasn't stretching enough. But I also had to show my reason why that request made sense based on the 5C’s above. 

And there were sad days when I saw a business fail and a business owner who lost their entire investment and many of their personal assets and that usually happened when the projections weren’t realistic or they tried to grow too quickly and one of the 5 C’s or more was way out of balance.   

There are other options to get your business started. The bank is likely the most risk-averse option that will join later in the game but they also demand a smaller return on their investment into you. Risk vs reward has a very linear relationship.