Has your business ever been turned down for a loan, leaving you wondering what went wrong? Creditors are required to provide a written explanation for their decision, but their reasoning isn’t always clear. As a business owner, understanding the underwriting process is crucial to knowing how your application will be evaluated. In this article, we’ll explore how loan brokers evaluate, match, and secure the right financing for business borrowers.
The loan broker’s mission is straightforward: connect clients with the ideal loan product from the right lender. To achieve this, brokers follow a refined process that identifies borrower opportunities. They assess each client’s situation and align it with the criteria used by lenders in their evaluations.
Brokers approach each deal on behalf of the borrower and with a lender’s perspective in mind, selecting the lender most likely to view the client’s scenario favorably. While borrowers can navigate this process independently, they rarely match the efficiency or effectiveness of a broker. Why?
Most borrowers lack the experience and time needed to evaluate every potential opportunity thoroughly. Finding the right lender can feel like searching for a needle in a haystack. That’s because each lender has a unique approach to risk assessment. Loan brokers dedicate their time to understanding these differences, ensuring your application is presented to the lender most likely to see its value.
The Six Cs
Lenders evaluate businesses using six key elements: capacity, capital, collateral, conditions, character, and chops. However, not all lenders prioritize every “C” equally, and some financing products focus on just a few while ignoring others.
This section examines how lenders assess the six Cs and how brokers position their clients’ applications to maximize approval chances. We’ll also explore scenarios showcasing successful borrower-to-lender matches.
Capacity: Cash flow is king. Does your business generate enough cash flow to cover its debts and repay a new loan? Cash signals to lenders your ability to meet financial obligations. A strong, consistent cash flow shows you’re capable of handling debt without jeopardizing the business’s stability.
Capital: Lenders want to see your commitment. The more capital you invest as a down payment, the less likely you will be to walk away from the loan. Capital provides a cushion for both you and the lender.
Collateral: Assets matter. Collateral serves as security for the lender if the deal doesn’t work out. It reduces their risk by giving them something to claim to recover costs.
Conditions: Timing is everything. Lenders assess market trends and your business’s ability to thrive under current conditions. A favorable market improves your chances of success and ensures the lender sees a return on their investment.
Character: Trustworthiness counts. Your credit history and financial habits paint a picture of your reliability. Lenders use this to predict how you’ll manage the loan and honor commitments.
Chops: How experienced is your team? Do you have a history of working successfully together in your industry? Lenders want to know if your team has done it before because it increases the likelihood that you can do it again.
A broker serves as a strategic matchmaker, connecting the borrower to a lender who views their six Cs in a positive light. Loan products naturally tend toward individual factors from the list. Factoring, for example, is focused on your client’s ability to pay, not on assets or cash down. So, it’s less about your capacity and collateral than the character of your client. Real estate lenders and equipment lenders are the opposite, placing a high priority on asset value.
But that’s not all! Lenders care about each of the Cs uniquely. Each lender has a strategy for being competitive while mitigating risk, weighing some elements more than others. They must balance them so as to attract borrowers and protect themselves from loss.
Let’s take a look at a few example scenarios:
Real Estate Investing
Robert, a real estate investor, applies for a traditional loan at his bank to purchase income-generating property. However, due to lack of cash flow from his business, the bank denies the application, citing insufficient capacity to close the deal. After being referred to a broker, Robert’s situation is assessed differently.
Rather than focusing on capacity, the broker considers the value of Robert’s collateral—the property itself—and offers a bridge loan instead of a commercial mortgage. This loan allows Robert to acquire the property, which he successfully transforms into an income-generating asset. After two years of strengthening his business’s cash flow, Robert refinances into a conventional CRE loan.
Retail Expansion
Janet’s retail business is growing rapidly, and she seeks funding to expand her inventory, staff, and physical space. She applies online for a business line of credit, but the lender requires high scores across all Cs, and Janet’s less-than-one-year track record doesn’t meet the necessary criteria.
Refusing to give up, Janet turns to a broker, who recognizes her solid 720 FICO credit score and profitable business. Rather than focusing on her limited history, the broker connects Janet with a lender specializing in supporting promising retail businesses. This lender allows Janet to secure the financing she needs to fuel her expansion and take her business to the next level.
Business Acquisition
Blake, seeking to bring accounting services in-house by acquiring an existing firm, applies for a traditional five-year business acquisition loan with a 10-year amortization period. However, due to his business’s lack of capital and a proven history, the traditional lender denies the loan.
Undeterred, Blake consults a broker who recommends an SBA 7(a) loan with a 25-year amortization period. While Blake’s capacity remains unchanged, the longer amortization period improves the deal’s debt service coverage ratio (DSCR). The extended term lowers the monthly payments, making them more manageable and enabling Blake to meet the required debt coverage for financing. Additionally, the SBA loan requires just 10% down, compared to the 25% down payment required by the traditional lender, making the down payment more feasible for Blake to manage.
There are many more examples of how a broker can help you find a lender and a loan product suited to your situation. These few examples provide a glimpse into how a broker thinks through each challenge to discover the right solution for you. But they can’t start helping you find financing until you reach out.
If you’re facing loan denials, contact us for a free financial audit of your business. There are no upfront costs; we make our money on standard closing fees. Let’s start your evaluation today!