How to improve your ability to obtain a loan

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Have you noticed that lately, getting a loan is more difficult than it has been in the recent past?

The availability and ease of getting a loan can vary based on several factors, including the economic environment, lending policies and the borrower’s creditworthiness. During times of economic uncertainty or recession, lenders often become more cautious and stringent in their lending practices. They may tighten their credit standards, resulting in a more challenging loan approval process.

Factors that affect all borrowers

Yes, getting a loan in the U.S. has become more difficult than in the recent past. There are several reasons, including:

• The COVID-19 pandemic led to a change in economic activity, which has made lenders more cautious about lending money.
• The Federal Reserve raised interest rates several times in recent months, which has made loans
  more expensive.
• The government has implemented stricter lending standards in an effort to prevent another financial crisis.

As a result of these factors, borrowers with good credit may still find it difficult to get a loan, and borrowers with bad credit may find it impossible to get a loan. If you are struggling to get a loan, you can do a few things to improve your chances of approval:

• Improve your credit score. This is the most important factor lenders consider when approving loans.
• Reduce your debt-to-income ratio. This is the percentage of your monthly income that goes toward debt payments.
• Shop around for loans. Compare interest rates and terms from different lenders before you apply for a loan.
• Be prepared. Although business loan applications vary by bank, they all require some basic information in common. Here are some universal questions:
  • Why are you applying for capital?
  • Who will be managing the business?
  • What will you use the funds for?
  • What assets do you need to purchase?
  • What is your personal background?

Dan Gordon, CPA

Lenders require accurate information

Don’t give the bank a reason to reject you. Make sure you have the following information accurately prepared:

• Personal Net Worth Statement of the Owner – The bank will usually give you a template they use to present the information. It may be a good idea to have your certified public accountant (CPA) complete this form, as he or she usually knows what the bank is looking for and will be able to provide complete information.
• Three Years Prior Personal and Business Tax Returns – If you are organized as a corporation, partnership, or limited liability company (LLC), you will need to provide a copy of the entity’s tax returns as well as your personal tax returns.
• Most Recent Profit/Loss and Balance Sheet – If you are using QuickBooks, these reports are extremely easy to produce. It would be highly advisable to have a certified public accountant (CPA) look at the interim reports prior to submission, if he or she is not already preparing them on a monthly basis.
• Most Current Accounts/Receivable Aging, Accounts/Payable Reports – The accounts receivable reports will come from your customer relationship management (CRM) software program and should be aged 30, 60 and 90 days. The accounts payable reports will come from your QuickBooks general ledger program and should be aged 30, 60 and 90 days as well.

Bankers will use these documents to assess risk. In most cases, working with your CPA to compile the information and make sure it is accurate is a good idea; your banker will use this information to perform an analysis. If your numbers are not accurate or demonstrate that you are either not solvent or unable to pay back the loan, you will be rejected.

Because of the recent tighter requirements lenders have put on borrowers, it has made the process more difficult. Make sure you don’t give your banker a reason to reject your loan application.