Commercial Lending:
Business Borrowing–Risk and Relationships
(Part 3 of 4 Articles)

This article is the third of four in a question-and-answer series on business borrowing. In this article, John Wroton, Assistant Vice President of Harrington Bank, Chapel Hill, North Carolina, addresses the concerns that arise when using your personal credit to obtain a loan for your business. His answers provide insight and a better understanding of how risk and your personal finances make a difference.

1. How do credit cards—even those without a balance—impact a loan application?

JW: Multiple credit cards are not necessarily viewed as a negative. High credit balances, credit cards whose balances are all at their limit, and total credit card debt does factor negatively on a loan application. Having multiple open credit cards can also negatively impact your credit score, regardless of whether those cards carry a balance or not. It is always a good idea to write your credit card company to close any card you are not using. By using only one or two cards, paying them on time, and not maxing them out, you will be a much better credit risk to a bank.

2. If a person has previously filed bankruptcy, does it prevent them from getting a loan, or increase the risk and consequently the interest rate?

JW: If the bankruptcy has not been discharged, getting a loan will be very difficult at best. Even once the bankruptcy has been discharged, banks will be hesitant to lend money to you or your business unless you have an additional guarantor or have excellent collateral for a loan (e.g., cash, equity in your primary residence, non-retirement investment account). Lenders who might work with you if you don’t have any of these items will charge you a very high interest rate and fees.

3. If a business owner decides to apply with many different banks for loans, is there an adverse impact on their credit rating just from applying for the loans?

JW: Each time someone pulls your credit, it does have an impact on your score. However, there are many factors that go into your credit rating and unless you continue to apply for credit many times over many months, these credit pulls are unlikely to have a significant impact on your overall score.

4. What services are available—directly from lenders or from other businesses—that would improve the chance of getting a loan or the terms of the loan?

JW: Lenders typically don’t offer any specific services to improve the chances of getting a loan. However, the loan officer at the bank should be willing to talk to you about what you will need in order to get a loan with that bank and may be able to refer you to people that he or she knows who could assist you.

There are various classes available that can help an entrepreneur understand the basics of business and what banks look for. Local community colleges are a good resource to start with. There are also individuals who do consulting for a fee, who can help prepare a business plan and work with you to help you get a loan. The phone book, the internet, or a loan officer at a bank are good ways to find these business consultants. Federal, state, and local governments usually offer programs as well and keep lists of various business resources. Local chambers of commerce and other networking groups can be an excellent place to get referrals to people who might be able to assist you.

5. If an applicant is turned down for a loan, how can he/she regroup and come back to try again? How long should he/she wait and what actions does he/she need to take to improve the application?

JW: If you are turned down for a loan, the bank has to give you a reason. Typically, talking to the loan officer will help to clarify what you need to do to become eligible. How quickly you can reapply depends on the reason for the credit denial. If the primary reason is bad personal credit, then it might take six months to a year to repair your credit.

6. Credit history of the business and/or the owner(s) plays a heavy role in assessing risk; how do lenders use the score? Is collateral the only “offset” to a low or poor credit history?

JW: Every lender will use the score differently and place a different weight on its value in the overall credit decision. Each lender might also have its own threshold for the credit scores (e.g., they just don’t lend to anyone with a credit score below 620). Some lenders will just look at the credit score number. Others might dig deeper into the credit report to try to understand the reasons behind a low score. Someone who has good overall financial strength (e.g., a large net worth) but poor credit might be viewed more favorably than someone who has a low or negative net worth and poor credit. It really does depend on the unique circumstances for that individual.

Cash collateral that can be placed in the bank and used to secure a loan is the easiest way to obtain a loan. Equity in a house or other real estate might also be a valid option.

7. If someone is considering starting a business, what foundation is needed before he/she starts the business?

JW: There is no right answer to this question. People have started successful businesses from their garage with no more cash than the sale price of their car in order to buy their initial inventory. On the other hand, there are businesses started with millions of dollars in cash that have failed. However, making sure that you are in a strong position financially (i.e., little to no credit card debt, all other debts paid off as much as possible, good credit score, at least six months cash savings) will help to ensure that if your business does not take off as fast as you thought it would (or if it takes off faster than you thought!) you will have the personal flexibility to make it work.

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Harrington Bank is a locally owned and operated community bank with two locations in Chapel Hill to serve all of your personal and business banking needs. Visit www.bankatharrington.com, or contact John Wroton, Assistant Vice President, (919) 945-7818, jwroton@bankatharrington.com