How to Determine if Your Client is Fundable
As an accountant, your client comes to you with all sorts of financial questions. But, which of these questions do you find the hardest to answer?
I hear all the time from accountants that their clients come to them, wanting to know what their chances are of securing a loan. I can imagine this could be one of your least favorite questions, as it is so conditional. How can you honestly answer this question?
Out of the gate, you should know that you’ll never be able to give your client a yes or no answer. But, they are certain factors you can both look at that should help you come to a conclusion, together, about their chances of finding funding.
So, is your client “fundable?”
Look at these factors to help decide:
Personal Credit Score
Almost all lenders will look at the personal credit score during the small business loan process. Many lenders will only look at the personal credit score, assuming business credit isn’t a good representation of payment history for small businesses. Lenders assume the owner will pay back the loan, so they want to know what the owner’s financial history is.
If your client has a credit score over 700, they’re going to be in a good position to get a loan, assuming other factors are also strong. At 620 or higher, they could still find some good options, but once the score dips below that, it will become increasingly harder for them to find a loan. That being said, it’s not impossible if their score is over 550, although their options will be limited to online loans. If your client wants a traditional term loan from the bank, they’re going to want to be in that 700+ range. The higher, the better.
Your client’s revenue is one of the most important factors on a loan application. Obviously, the better their sales are, the more confident the lender will be in their ability to repay. However, revenue is also used to determine loan size. If your client does $100,000 a year in revenue but wants a $600,000 loan, that’s going to be hard to find. Lenders will usually only make loans equivalent to around 8 to 15% of a business’s annual revenue. When your client tells you how large of a loan they want, you can help manage their expectations by quoting them this number.
It’s not just about your client’s business’s sales; it’s about how well they are managing that cash coming in. Almost every single lender out there (except for some invoice factoring companies) is going to ask for your client’s business bank statements. The reason that lenders want these documents is that it is the best way to verify how much cash your client keeps on hand. They want to know that the business has a strong cushion, in case something unexpected happens down the road … while they’re still paying off their loan. The bigger their bank balance, the better.
Again, it’s great if your client has a lot of sales, but are they profitable? Many high growth companies struggle with profitability, as they spend so much to simply keep up with that growth. Your clients don’t need to be profitable to qualify for some types of loans, but it certainly helps if they are. And, if they want a chance at lower-cost loans, such as SBA loans or traditional bank loans, they will certainly want to be profitable. It’s not just because this indicates a healthy business, but remember that lenders are trying to determine how a business is going to pay them back. If a business isn’t profitable, it’s that much harder for lenders to feel confidently that the business can handle the debt.
Does your client already have another small business loan? If so, this could affect their “fundability.” Many lenders will be worried about their ability to afford more debt, especially considering how large of an amount they still owe the first lender. The other issue is that many lenders don’t want to take what is called “2nd position” to another lender. Almost all lenders will file a UCC lien on a business when they make a loan to them. This means that if the business defaults on the loan or goes bankrupt, the lender will have a right to the business’s liquidated assets until the debt is paid back. When a 2nd lender comes into the picture, their lien goes into “2nd position,” which means that if the borrower defaults or goes bankrupt, they are only able to be paid back once the first lender is. It’s a riskier position for lenders. This being said, some lenders will take 2nd position to others, usually based on how much debt the borrower has remaining. And, if your client’s debt is almost paid off, that’s even better!
Other Red Flags
Outside of the big factors, there are many red flags that lenders look for during the loan application. For example, if your client has had a recent bankruptcy, this could be an issue. Many lenders have a specific time period they want to have passed before they work with a borrower who has had a bankruptcy, so if you feel this could be a problem for your client, make sure they tell the lender first before applying. Other things lenders will look for are judgments, collection proceedings and foreclosures. Another thing we see hold up a lot of borrowers is a tax lien. A tax lien can be a problem for many lenders, yet some lenders will work with a borrower if they’ve at least established a payment plan.
You may not know that your client has a red flag. You should ask them if there is anything they feel that lenders will find on their credit report that could be an issue. Ask them specifically about the above: liens, bankruptcies, judgments, foreclosures and more. It’s better if you come to the table asking lenders if they work with a borrower who is in that position, rather than taking the time to complete an entire application and finding out they don’t, after the work is done.
Obviously, answering the question “is my client fundable?” is very hard. The only way to truly determine the answer is to complete an application. However, if you and your client can walk through the factors above, you’ll have a better idea of their chances of finding a loan (and an affordable one at that), and what potential obstacles there could be in the process. You’ll be able to somewhat set your client’s expectations, allowing them to have a transparent start to their search.