Has your company ever been denied a loan, making you wonder what went wrong? Creditors must provide written explanations for their decisions, but their reasoning is not always clear. As a business owner, understanding the underwriting process is essential to know how to evaluate your application. In this article, we will explore how loan brokers evaluate, match and provide the right financing for corporate borrowers.
The task of a loan broker is simple: connect the client to the ideal loan product for the right lender. To achieve this, brokers follow a sophisticated process that can identify borrowers’ opportunities. They evaluate each client’s situation and align it with the criteria used by lenders in their assessment.
The broker handles each transaction on behalf of the borrower and keeps the creditor’s point of view in mind, thus choosing the most likely offer to the client’s situation. Although borrowers can browse this process independently, they rarely match the efficiency or effectiveness of the broker. Why?
Most borrowers lack the experience and time needed to thoroughly evaluate all potential opportunities. Finding the right lender may be like looking for a needle in a haystack. That’s because every lender has a unique approach to risk assessment. Loan brokers are specifically used to understand these differences, ensuring that your application is submitted to the lender who is most likely to see its value.
Six CS
The lender uses six key elements to evaluate the business: capacity, capital, collateral, conditions, personality and ribs. However, not all lenders prioritize each “C” equally, while some financing products focus on a few Cs and ignore others.
This section describes how lenders evaluate six CS and how brokers target clients’ applications to maximize approval opportunities. We will also explore scenarios that showcase successful borrowers to lenders’ competitions.
capacity: Cash flow is king. Does your business generate enough cash flow to repay debts and repay new loans? Cash Signal provides loans with your ability to meet financial obligations. Strong, consistent cash flow shows that you have the ability to handle debt without jeopardizing the stability of your business.
capital: The lender wants to see your commitment. The more capital you invest in, the less likely you will be to leave your loan. Capital provides mats for you and lenders.
Collateral: Assets are important. If the transaction cannot be resolved, the collateral will serve as the security of the lender. It reduces their risk by giving them something that requires recouping their costs.
situation: Time is everything. Lenders evaluate market trends and your business’s ability to thrive under current conditions. A favorable market improves your chances of success and ensures lenders see their return on their investment.
Features: The importance of trustworthiness. Your credit history and financial habits portray your reliability. Lenders use it to predict how to manage loans and honor commitments.
seal: What is your team experience? Do you have a history of successful collaboration in the industry? The lender wants to know if your team has done it before, as this increases the likelihood that you can do it again.
A broker is a strategic matchmaker who connects borrowers to lenders who view their six CS with a positive attitude. Loan products naturally tend to introduce personal factors from the list. For example, consider the client’s ability to pay, rather than the decline in assets or cash. So, compared to the client’s personality, it has to do with your abilities and collateral. In contrast, real estate lenders and equipment lenders have high priority for asset value.
But that’s not all! Lenders are uniquely concerned with each CS in the CS. Each lender has a competitive strategy while mitigating risks, weighing certain elements more than other lenders. They must balance them to attract borrowers and protect themselves from losses.
Let’s take a look at some examples:
Real estate investment
Real estate investor Robert applied for a traditional loan at his bank to buy income-generating property. However, due to his business lacking cash flow, the bank rejected the application, citing insufficient ability to complete the transaction. Robert’s situation was assessed differently after being referred to the agent.
Rather than focusing on capacity, the broker considers the value of Robert’s collateral (the property itself) and provides bridge loans instead of commercial mortgages. The loan allowed Robert to acquire the property, which he successfully transformed into an income-generating asset. Two years after strengthening business cash flow, Robert refinanced traditional CRE loans.
Retail expansion
Janet’s retail business is growing rapidly, and she seeks funding to expand its inventory, employees and physical space. She applied for a commercial line of credit online, but lenders need to score high on all CS, and Janet did not meet the necessary criteria than her year-on-year track record.
Janet refused to give up and turned to a broker, recognizing her stable 720 FICO credit score and profitable business. Rather than focusing on her limited history, the broker connects Janet to lenders who specialize in supporting promising retail businesses. This lender allows Janet to ensure the financing she needs to expand and take the business to the next level.
Business acquisition
Blake seeks to implement internal accounting services by acquiring an existing company, which has applied for a traditional five-year business acquisition loan and applied for a 10-year amortization period. However, due to his business lack of capital and a reliable history, traditional lenders denied the loan.
Blake undoubtedly consulted a broker who suggested using a 25-year amortization period SBA 7(a) loan. Although Blake’s ability remains the same, the longer amortization period improves the transaction’s debt coverage (DSCR). The extension reduces monthly payments, making it easier to manage and allows Blake to meet the required debt coverage. Additionally, SBA loans only need to drop by 10%, while the 25% down payment required by traditional lenders makes Blake’s down payment more viable.
There are many more examples of how brokers can help you find lenders and loan products that suit your situation. These few examples provide a glimpse into how brokers can discover the right solution through each challenge. But they can’t start helping you find financing until you reach out.
If you are facing a loan rejection, please contact us to conduct a financial audit of your business for free. There are no upfront fees; we make money by standard closure fees. Let’s start the evaluation now!
