What Small Business Lenders Have to Tell You When You Apply for Credit

What Small Business Lenders Have to Tell You When You Apply for Credit

What Small Business Lenders Have to Tell You When You Apply for Credit

When Nav surveyed small business owners we discovered that nearly a quarter of those turned down for business financing said they don’t even know why they were turned down. If lending is such a highly regulated industry, how is that possible?

There’s a simple explanation. The laws that give consumers detailed information when they are turned down for loans don’t always apply to business loans, and as a result, entrepreneurs are sometimes wondering why they didn’t get the financing they requested.

So here’s a rundown of what business owners can (and cannot) expect when they are turned down for credit.

But first, a brief overview. There are two federal laws that require disclosures when credit applications are rejected. One is the Equal Credit Opportunity Act (ECOA, or Regulation B) and the other is The Fair Credit Reporting Act (FCRA). While these laws are very specific about certain obligations creditors must meet, my goal here is to give you a general overview so you have an understanding of what to expect. In other words, although I’m an attorney, I’m not writing this like one. If you want a deep dive, you can read more here.

Here’s what you don’t get if you are a business owner:

Free Annual Credit Reports

If an individual applies for a consumer loan, the creditor uses a credit report in the decision. If the application is rejected, or the individual is charged more because of that credit information, the lender is required to provide an “adverse action” notice. It must include the name and contact information for the credit reporting agency that supplied the credit report to the lender. The consumer then has the right to request a free copy of his credit report from that agency, and that freebie doesn’t count against the one free report he can request each year from each national consumer reporting agency at AnnualCreditReport.com.

Individuals who apply for a business loan, however, are not entitled to a free disclosure of their commercial credit reports, even if information in one of those reports was used to make the credit decision. Note, however, Nav provides small business owners with free business credit scores and summary reports from Experian, Dun & Bradstreet and Equifax.

Free Credit Scores

As a consumer, if you are turned down for credit or charged more because of a credit score, the lender must tell you the score used (the actual number), the range of scores for that particular scoring model, key factors affecting the score, the date on which the score was created, and where the score came from.

But, again, if you are a business owner, no such disclosure is required. It’s not surprising, then, that in the Nav American Dream Gap Report findings mentioned above, 45% of business owners surveyed did not know they had a business credit score, and 82% don’t know how to interpret theirs. The only free source for personal and business credit scores is Nav.

What Business Owners Do Get

Business owners don’t get free credit reports or scores in the case of adverse action, but that doesn’t mean they are kept completely in the dark when applying for credit. Although the FCRA doesn’t apply when entrepreneurs are trying to get business financing, Regulation B does contain requirements that apply to business owners who apply for financing for their small business.

Under that law, adverse action occurs when the creditor refuses to grant credit in an amount or with terms substantially similar to what the applicant applied for—although if the creditor makes a counteroffer the applicant accepts, it’s not considered adverse action. It also includes terminating an account or unfavorably changing the terms of the account—unless the change affects all or most accounts—or refusing to grant a credit line increase requested by an applicant. It doesn’t include an action taken because the borrower is delinquent or in default, or if the account is inactive.

A creditor must provide a notice when it takes adverse action on a completed or incomplete application, or on an existing account, or when it makes a counteroffer that the applicant doesn’t accept. And generally it must provide the notice within 30 days—or 90 days after a counteroffer. This applies to business applicants, not just consumers.

Remember to Ask

But here’s the catch: Creditors don’t have to spell out everything in that notice. A creditor must provide its name, address and the statement of action it took—rejecting the application, for example. But it doesn’t have to spell out the reasons for taking that action in that letter. The creditor can instead tell the applicant she has the right to request that information, and provide the name, address, and telephone number of the person or office from which that information can be obtained.

Here’s still another hitch: First, the adverse action may be given in writing, or verbally. So there may not be a letter or written disclosure at all. Second, in the case of an application by a business with $1 million or less in annual revenue the previous fiscal year, the right to receive the reasons for rejection can be provided at the time of application. In other words, the business owner may have to take note of that information when she applies, and then if her application is rejected, remember to follow up on it. Given that the average business owner spends about 26 hours searching and applying for credit, it wouldn’t be surprising if that detail slipped by her.

To be fair, there are creditors who are transparent and provide all business owners whose applications are turned down with an adverse action notice in writing, but not all do. They don’t always have to, as long as they provide the information required by Regulation B.

Turn No Into Yes

It is important for you, the business owner, to understand why your application was turned down, or why you were charged a higher rate when you tried to get financing. If your credit scores aren’t strong enough, you can take action to build strong business credit, for example. Or maybe there’s a mistake on your credit reports that, if fixed, could turn the decision around. And lenders may have “reconsideration departments” where a “no” may be turned into a “yes,” or where they can at least make a counteroffer.

So the next time you apply for a small business loan, be sure to take note of any instructions that describe what happens if your applications isn’t approved. And if you don’t get the financing you requested, be sure to find out why.

Better yet, let Nav help you understand which credit card and financing options you are most likely to qualify for. Nav uses a proprietary algorithm, along with machine learning, to instantly filter and display financing options and credit cards you’re most-qualified to receive — all without requiring a hard credit pull. Sign up with Nav now to see your best options.

This article was originally written on July 18, 2016 and updated on October 3, 2023.

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3 responses to “What Small Business Lenders Have to Tell You When You Apply for Credit

  1. Due Date and Statement closing date are two different things: Always pay the minimum(and MORE by the due date) but get the individual card under 30%(ideally 1-8%) by the time it closes and reports to the bureaus. You will know your statement closed because you’ll see the minimum amount for the NEXT month on your screen/in the mail. IE you will see Minimum due 4/23/16 in MARCH. Fico factors both individual card utilization and overall utilization of all cards you have combined. If you have a card with a limit of 500 and the statement closes with a $244 balance, you are using 49% of your limit. Not ideal. No more than 30% is recommended. Less than 10% is ideal. If you have 4 cards and all their combined limits add up to 23,000, you owed 5,000 between the 4 cards, your overall utilization is, 22%. Not bad. Utilization only counts with revolvers. Installment loans don’t count in utilization BUT installment loans give your credit a boost. Shows a mix of credit. NEVER, EVER, EVER, EVER leave a 0 balance on ALL your cards. Your scores will drop. You need a small amount of debt reported. Ideally <10% of the card limit. You can then pay it after the statement closes. These are not necessities. Only if you want optimal scoring.

  2. In my experience each lender has a set of criteria they are looking for prior to lending money. What appears to be on the surface level, for many business owners seeking capital is, a mass advertisement that applying for business credit is easy. Good or bad credit, doesn’t really matter, as much as the overall general health, of your business is in good standing, you will be approved. This is not the case your personal credit matters, the type of industry you are in is a factor, the time your business has been established matters, your frequency of deposits matters, your average daily balance matters, your industry type matters, seasonality matters, your like-ability from your interactions you have with the funding company matters, the timeliness you provide supporting documentation requested matters, if you are shopping around for the best deal this matters to and Unfortunately can hurt your chances of approval. If you are applying for funding, know this the systems they use are smart, very smart, they know more about you and your business, than they will ever admit. That said there is plenty of money out for your business, it’s just a matter of navigating all of the possible options.

    1. Very good insights, Matt! A lot goes into a lender’s underwriting process and it varies from lender to lender. Like you said, plenty of options are out there, it’s just a matter of navigating them. That’s exactly why Nav built MatchFactor. It instantly filters dozens of the top loan and business credit card options and shows you your best matches, so you can save time researching. The algorithm does this by comparing your credit and business info to each lender’s underwriting requirements. You can learn more about MatchFactor here: https://www.nav.com/blog/matchfactor-smarter-business-financing-11245/