By Bruce Hurta
I have been lending to small businesses for 30 years, and I have been asked many times why business loan applications require us to review personal credit histories. Why can’t we just review the credit history of the business applying for the loan? My responses to that question are summarized below:
First of all, SBA lenders (myself included) do review the credit history of the business to the extent that we can. If there are previous loans in the name of the company, we like to see if they were paid according to the loan agreements. Some of these business loans might be reflected on personal credit reports of the owner of the business due to the owner’s personal liability on those business loans. Many will not. In those cases, we can review payment histories generated by those lenders.
Some small businesses will have everyday trade accounts where the vendor provides credit to the company. Once again, if the small business pays all its bills according to the terms granted by the vendor, the SBA lender will make note of the good payment history. The SBA lender might order a Dunn & Bradstreet report. Businesses with multiple vendors granting credit terms for various products and services might be verified by Dunn & Bradstreet and reported on their account.
Giving Credit Where Credit is Due
What about businesses that are startups and have no previous debts or credit history? What about small businesses who do not have vendor trade accounts? If there are any other creditors for the business that the small business loan applicant wants the lender to know about, they can provide that creditor’s contact information, and the SBA lender can perform direct verification of payment history with those creditors (assuming they will cooperate to provide the information).
All the above measures can be taken to prove a good company credit record, and they can be helpful to qualify the small business for SBA financing. Personal credit histories of the owners of the business, however, are still probably the best measure of the SBA lender’s assessment of the small business’ likelihood that they will abide by the SBA loan terms. Small business lenders and the SBA know that how an individual pays his bills in the past is the best indication of how they will be paying them in the future. Small business loan approvals are not an exact science. There are many moving parts in the equation of how a business will perform in the future. This is where the art of SBA lending comes into play.
At this point, the SBA lender will factor in human behavior to the process of a business loan approval. Small business lenders know that every small business reflects the behavior of its owner(s) when it comes to keeping agreements. Like consumer lenders, we know that if a borrower has paid a lot of obligations on time, and in accordance with their agreements with their lender, they are much more likely to continue doing so in the future. We know that small business owners will be faced with many challenges and opportunities to assume or avoid risk. The business owners who have successfully managed their past personal and business debts are the ones most likely to continue to do so in the future.
Good Stories Go a Long Way
Does this mean that someone who has paid business or personal debts late in the past will be denied access to credit in the future? No, it does not mean that; however, explanations of late payment histories will be required. Due to the government backing on an SBA loan, an SBA lender is likely to exercise more understanding and forgiveness for problem credit with a “good story.” We call those loan applications ones with “storied credit.” Sometimes the best measure of a person’s credit behavior is how they handled difficult circumstances in the past. That is why I always tell applicants to carefully document each instance of derogatory credit. If those instances are limited to a particular time and a particular set of adverse circumstances, your story about how you managed to ultimately fulfill your payment agreements might be impressive to the lender.
I always summarize the benefits of SBA loans to be lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank loans. The third benefit, “easier qualifying criteria,” can be a boon for the small business owner seeking new debt to grow and expand their business with an SBA loan. The SBA lender has more flexibility to consider all forms of past personal and business credit history to qualify the new loan application than a conventional bank lender will have. We understand that small business owners must juggle many other responsibilities besides managing their credit. We understand the impact of circumstances beyond your control if you react well to and recover well from those situations.
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For more information, please contact Bruce Hurta, Business Lending Manager at Member’s Choice Credit Union by phone at 281-754-1112 or by email at BHurta@mccu.com. You can also follow Bruce’s Blog at http://bruce.hurta.wordpress.com/mccu.com.
