Last month I wrote about how data drives loan decisions and the eight questions a small business needs to be ready to answer when applying for a loan. We didn’t talk about how verifiable data improves the odds of a loan approval—we’re going to talk about that today.
For reference, here are the eight questions:
- How quickly do you need financing?
- How long have you been in business?
- What is your annual revenue and cash flow?
- What is your industry?
- What is your personal credit score?
- Why do you need the financing?
- How much money are you looking for?
- Will you accept ID verification?
Lenders make decisions about you and your business based upon data. The days of a friendly handshake over a loan officer’s desk and his or her internal gut-check about the creditworthiness of your business and your credibility are simply not a part of the business loan application process any more.
Pre-COVID-19 data collected by the Federal Reserve’s 2020 Small Business Credit Survey, cites that the number of small businesses with less than 500 employees that applied for some kind of financing in 2019, remained flat from the previous year (31%). What’s more, only 22% of those that applied got all the funds they were seeking and only 27% were actually able to meet their financial needs with borrowed capital.
The Paycheck Protection Program and the Economic Injury Disaster Loan programs, intended to help small businesses stay afloat during the economic challenges caused by COVID-19, have delivered billions and billions of dollars to businesses, but it’s still a mixed bag with millions of our country’s smallest small businesses unable to access funds.
If you’re like me, it would be easy to blame the SBA or the lenders making these loans, but I think there’s enough blame there to go around (although that is’t the topic of this article).
What is it that makes it difficult for small businesses to access borrowed capital? There are a number of reasons according to the Fed.
- Too much debt (44%)
- Low credit score (36%)
- Insufficient collateral (33%)
- Too new/insufficient credit history (30%)
- Weak business performance (18%)
- Other (9%)
In other words, of those that applied for small business financing in 2019, there were a lot of reasons they were declined.
Approvals Require Verifiable Business Data, Do You Have It?
In the same survey the majority of small business owners (88%) rely on the owner’s personal credit score to access borrowed capital and 56% of owners rely on personal savings, friends, or family to access the capital they need to fuel growth. It’s true that for most small business owners in the U.S., their personal credit score will always be a part of any business creditworthiness discussion—but it isn’t a complete way to evaluate a business.
During the first few months of the PPP, many loan applications were rejected because small businesses didn’t have access to the financial information they needed to qualify for a loan. This problem isn’t just associated with PPP or SBA loans either. It’s not enough to answer the eight questions listed above, the answers need to be substantiated with verifiable evidence. In other words, the data needs to be consistent with the assertion.
The Average Online Application Process Can Make This More Challenging
Have you ever filled out a loan application that looked good, seemed to meet the lender’s requirements, only to have it rejected? You’re not alone.
Many lenders (and online loan applications) ask you to self-report some pretty important data about your business’ financial health—revenue, cash flow, personal credit score, etc. Depending on that data, the lender will review your application, or if you’re working with a loan aggregator, you’ll get matched to a potential lender who is looking for small business borrowers like you.
In far too many cases, because the self-reported information doesn’t match the data readily available to the lender making the loan, your loan application is rejected. That’s why verifiable data before you submit the application is so important. And, one of the reasons why when you apply for a loan at Nav we encourage you to link your business bank account and verify the information before you submit an application.
For example, when you apply for a business credit card using Nav’s MatchFactor, you’re 3.5X more likely to get approved. That’s because MatchFactor verifies your data before it’s submitted to a potential card provider. Small business loans or lines of credit work the same way. Verified data makes the application process smoother and increases the likelihood a loan application will be approved.
What Should the Average Small Business Owner Do?
There are a few things a business owner should be doing that will help ensure the financial data lenders use to make loan decisions is accurate:
- Make sure the information in your personal and business credit profile is accurate and up to date.
- Make sure your accounting information accurately reflects the financial condition of your business.
- Accept the opportunity to verify your data before you apply for a loan.
- If a lender asks to link to your bank account to verify your revenue and cash flow, allow it.
Of course, verified data doesn’t necessarily mean you will automatically qualify for the loan you’re seeking, but it will help a loan officer or funding specialist connect you with the type of financing and the lender that makes the most sense for your situation. What’s more, iit will put your application on the top of the pile and improve your odds of success.