In today’s market it is getting more and more difficult to get a business loan. Often companies that would have easily been approved two years ago are being turned down, leaving owners searching numerous sources for loans. The good news is … there are community banks and non-traditional funding sources that are still lending money.
The bad news is … sometimes businesses have to search through several sources before they find a good fit. If you are turned down by your banker for a new loan or if your bank has called the loan due, where do you start? Many banks are willing to give you referrals to another lending source. The idea is that you will bring your business back to them when either the economy or your business’ situation changes.
If you are looking for financing there is a ‘trick of the trade’ that can potentially save your business time, money and frustration. Don’t sign the application! Sounds like a crazy idea doesn’t it? Let me explain. Like any industries there are the good guys and not so good guys. Once you sign an application there are several things that might potentially happen:
1) In almost all cases, signing the application gives the lender permission to check your personal credit. They check personal credit (usually of all 20-percent shareholders) because they want to know what your borrowing character is like and because you will be required to sign a personal guarantee. The more lending sources make credit inquiries the lower your credit score goes. In some cases, your credit could drop 50 – 100 points which could be detrimental to getting a loan.
2) When one financing source checks your credit, future sources can see the names of the inquirers. If you have several inquires on your credit it sometimes makes the lender ask ‘Why didn’t they get funding with the other sources? Is there something about this company that I am unaware of?” Although we would like to think new potential lenders would be looking at your loan request with fresh eyes, the truth is they often look at the previous inquires with prejudice.
3) Third and most importantly, less scrumptious lenders will file a blanket UCC filing on your business. They do this in order to cover their due diligence costs related to you and your business. Doesn’t sounds so bad? But if you decide not to do business with them, you are at their mercy. They can charge your company whatever they like in order to release the UCC and thus get funding from another source. Most reputable lenders don’t do this. But like any industry there are bad apples. If you read the very fine print at the bottom of many business credit applications you will see that you give them the right to file a UCC when you sign it.
The best thing to do if you are talking to different sources is to fill out the application but don’t sign it. Pull credit reports from all three major credit bureaus for all parties expected to sign personal guarantees and submit them with the application. Once you have accepted a proposal it is appropriate to sign the application and have your personal credit pulled. Most reputable financing sources will not have a problem with this strategy, if they do, ask why!
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: firstname.lastname@example.org
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EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.