Factors Lenders Use in Underwriting Loans

The most important factor that lenders use in evaluating loans is the bank statements. The stronger the bank statements, the better the chance is in getting an approval. However, there are other factors that go into the lending decision.

Time in Business

Although there are some lenders that will consider businesses for funding that been operating for 3 months, most lenders want the time in business to be one year.  In fact, a few lenders insist on 2 years.  Obviously,  the longer the time in business, the better the chance of approval and the better the terms will be.

Type of Business

There are businesses that lenders will not fund at all, even if they are legal.  This includes strip clubs, drug paraphernalia shops or pawn shops.  There are restricted industries as well.  Lenders will fund these businesses but the terms will not be as good and the underwriting will be stricter.  This includes truckers,  gas stations, financial services, firearms sellers and bail bondsmen.

Location Of Business

Although lenders will fund home based businesses, the terms will more stringent and the underwriting will be stricter.  Lenders feel more comfortable lending to business that have a separate place of operation from the home.  These businesses seem more established and less likely to just fold up and close because the owner is paying rent or owns the location of the business.

Business Credit

Aside from the owners personal credit, lenders will consider the whether the business itself has a credit history.  May businesses do not have a credit history because creditors of the business do not report their history to any reporting agency.  Taking out a business loan is a good way to establish credit.  Of course,  if there is a credit history, good or bad, this will be taken into account.

Credit Report

Although the owner’s credit is a minor consideration and I have funded businesses where the owner’s credit score was below 500, there are still red flags to be considered. The owner cannot be in active bankruptcy.  If the owner has substantial tax liens, there must be a payment plan in place.  The same thing goes for judgments.

Many of the obstacles discussed can be overcome with good bank statements and evidence of good cash flow.

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