Starting a small business often requires you to use your personal credit to get things rolling. However, once your business is producing cash flow, you may choose to move that debt to a small business loan. There are several factors that can impact how much you can borrow and the terms you can get.
Changes in lending restrictions and the tests lenders need to apply to the ability of the borrower and the business to pay back the debt will impact how much you can borrow. There is a new credit loss model referred to as the Current Expected Credit Loss or CECL. This model requires lenders to compile payment history, current conditions and forecasts to estimate the risk of loss over the life of the loan.
Qualitative & Environmental
Lenders can now review the qualitative and environmental factors of a small business to determine the riskiness of a loan. These factors include the remaining terms of existing loans, any prepayments that are in place and the quality of the management team leading the small business. If your firm’s finances have been shaky in the past but you have brought on new leaders to better manage the company, your lender can consider this improvement in determining the creditworthiness of your business. In addition, tangible assets of your company can serve as visible equity and contribute to your bottom line. According to Visible Equity, calculating Q&E factors in CECL can help you estimate credit losses which may differ from historical losses. If you’d like to borrow but have shied away from traditional lenders due to credit problems in the past, consider reapplying when these regulations go into effect.
Demonstrate Reasons to Borrow
You can improve the creditworthiness of your business by making the right investments with borrowed funds. For example, if you’re ready to increase your production space or develop a new product line, make sure to put together a business plan to take to your lender as well as your tax returns and balance sheet. CECL changes allow lenders to look forward as well as reviewing your credit history and the credit history of your business. Regulations put in place after the financial crisis of 2007 are requiring banks to look further into the future when considering the ability of lenders to pay off their loans. If you are interested in starting a new business, be aware that these regulations can help you find funding.
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