In last week’s blog post, I walked you through the 3 paths to lending. After you’ve figured out what path is best for you, the next step is to actually get qualified. One thing you don’t want to do is fill out multiple applications trying to obtain the funding you need because each application is going to affect your credit. That’s the last thing you need when trying to get a loan!
So, what’s the best route to take to qualify? It depends on the lending path that’s best for you.
As I mentioned above, your lender is going to look at your credit. Most people think that their credit score is the only thing that matters in this situation but there’s actually more to it. Your score really only shows lenders whether you pay your bills on time or not. One of the biggest things they’re trying to determine is how much money they can actually loan to you and there are 4 factors that help make that determination. The first one is derogatory items such as whether you have any late payments, anything outstanding in collections, judgments, bankruptcies, etc. The second factor is utilization, i.e. how much of the money on your credit cards are you actually using. This is calculated by looking at the balance of your credit card and dividing that into the total limit. If you have a limit of $1,000 and your current balance is $500, you are utilizing 50% of your credit. You always want to make sure you are below 30% to get the best terms. The third factor is the age of the file. The lender will look at the oldest item on your report to determine your credibility as a borrower and as I’m sure you know, the older the file, the better your chances are to obtain funding, especially if all files are in good standing. The last factor considered here is credit inquiries. If a lender sees several inquiries on your report, it doesn’t look good. Banks want to lend to people who look like they don’t need money!
We talked about Revenue Based Funding in last week’s blog post and this path is great for businesses who either have revenue now or can show that they have potential future revenue coming in. When it comes to qualifying, the variables differ depending on the program. For example, if you’re trying to obtain a purchase order, the bank is going to look at future revenue potential versus a Merchant Cash Advance option which will have the lender looking into your merchant and bank statements. You’ll see purchase orders done in a lot of businesses where they are making a product to sell to a store. The business wants to obtain a purchase order to continue producing the product in order to supply to stores. The lender will then get their money back on the purchase order when that store pays the business. Lenders always want to determine that the business you’re working with to get the purchase order is credible and may even look at that business’s credit to ensure it’s a reliable loan.
Invoice factoring is another way to qualify for funding here and you’ll see this done a lot in the construction industry. Construction contractors generally don’t get paid until their work is done but in the meantime, they still have to pay their workers, buy supplies, etc. They can look to invoice factoring where a lender will give them an advance on funds until the invoice is paid by the contractor’s client. In this situation, the lender is going to look at the invoice amount as well as your previous work history to determine eligibility for funding.
Another way to qualify for revenue based funding is through a line of credit which takes into account previous income, tax returns, bank and/or P&L statements to determine how much funding you’re eligible for. You may also pursue revenue term loans which are based on past revenue of a business and will require proof of that revenue to qualify.
Asset based funding is typically used for real estate, equipment, stock loans, or settlement loans. And just like revenue based funding, qualification depends on the type of asset program you’re looking for. In real estate, the lender is going to be looking at everything from location, the value of the real estate, and type of real estate. This also varies if you’re talking about commercial or residential property because the underwriting is different and they will be evaluated differently. The type of asset can also dictate the Loan to Value (LTV) and the max amount given. The max LTV is going to be different for an apartment than it would be for a grocery store.
There are two ways to qualify for equipment funding, either through obtaining the funds to purchase the equipment or through an equipment sales lease which is done when you already own the equipment. This is where you use the equipment you own as collateral in exchange for financing. You can use this for a variety of equipment, everything from furniture to computers and vehicles.
As for stock loans, the only type of stocks that can be used as collateral are publicly traded stocks. In this program, the lender will look at the type of company, the market cap, and even the CEO’s earning potential.
Settlement loans will look into the judgment itself and also the paying party to determine the amount of funding that can be extended.
Credit isn’t the main factor when it comes to asset-based funding but it is looked at and again, the credit score is not the only component here. So even if you have a low score, there is still potential to qualify for asset based funding, though your terms may not be as favorable as someone with a higher credit score.
As you can see, the steps to qualify for funding vary depending upon the type of business you have and the funding you need to obtain. If you have questions or want to walk through these options with a professional, you can always reach out to us at Pennington Consulting Group for help.
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