5 Cs bankers ask for small biz loans post-Recession

bankers ask for small business loansAfter the Great Recession of 2008, the lack of sources for borrowing money has put many small businesses on hold or simply cleaned them out. The quest to borrow money to sustain operations or build inventory has been a lost battle for startups and those less than two years in business. Here are some tips from Betty Reiff, Assistant Vice President Portfolio Credit Manager for the Sun National Bank Business Banking division to improve your chances to obtain access to traditional small business loans.

Banks still keep a tight fist on small business loans

In this tough economic environment, banks ensure that loans will be repaid by streamlining the application process and helping potential borrowers understand the loan requirements and their debt obligations. As an underwriter, Reiff believes the five Cs of loan evaluation have not changed but the order in which each one is evaluated has. She refers to capacity –or cash flow-, collateral, capital, conditions and character.

  1. Capacity or cash flow requirements are placed at 1.2 times the amount of the requested loan. If $100K is the amount requested, Reiff needs to see approximately a monthly cash flow of $6000 net income –after interest and depreciation– to approve the application.
  2. Collateral is another tough requirement that only has not eased but increased since the Great Recession. “We expect the borrower to pay down 25 to 30 percent towards the purchase of a real estate property while working capital tops 80 percent of accounts receivables under 90 days,” she said.
  3. Capital is the amount banks require small entrepreneurs to invest in their own business, and how much they would invest at the time of the request. The bank should not be the only source of funds.
  4. Conditions –the capacity of the business to deal with current economic climate as well as any Nature or man provoked disaster need a sustainable plan and a small business should be able to provide one in those circumstances.
  5. Character talks to the personality and disposition of the borrower used to be a very important factor in the lending process but with a changing economy, banks’ ability to extend traditional finance has lessened. Even if the small business owner has been a bank client for many years, character will not change a “no” to a “yes” in the underwriting process if the cash flow and the collateral are not strong factors, according to Reiff.

Did you have a bankruptcy due to a nasty divorce? Tax liens or judgments because of a family member’s long-term care? Partners that left you running on empty? All the information that will appear on your credit is viewed with better eyes if explained in anticipation.

“Not all negative information is bad news if the underwriter can see you handled the situation properly. It might even help the borrower in certain cases.”

Most importantly, do not hide any information. Reiff “googles” her clients and their businesses trying to confirm stories and situations. “With all the public information out there, it is hard not to find what you are looking for. Better to tell everything up front and see if the item can be overcome than have the underwriter discover something and wonder ‘What else don’t we know,’” she concluded.Business Handshake


General small business loans 7(a): amounts, fees & interest rates

The specific terms of SBA loans are negotiated between a borrower and an SBA-approved lender. Find out what provisions apply to all SBA 7(a) loans. (At the SBA corner)


(A version of this article appeared on May 2013