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How we make our lending decisions

Building your credit is important to growing your business. We feel that the more you know, the better your chances will be in securing business credit.

Five factors we use to assist us in making lending decisions

  • Credit history. Every business credit bureau evaluates scores differently, but your credit history gives lenders a barometer on your financial health and behavior. Lenders want to ensure that you have a strong business and personal credit history before approving you for credit. If you have a history of paying your loans on time and not taking out more money than you can afford to pay back, lenders will most likely view you as a responsible borrower.
  • Capacity. Your business’s capacity to repay the loan is another important factor lenders consider. Lenders will want to see that your business has a positive cash flow and is returning a steady profit. They’ll also want to know how you plan to pay back your loan. Prepare records of your verifiable income.
  • Capital. The money you invest in your business will also have an effect on lenders’ credit decisions. If you invest a large amount of your own money into your business venture, it suggests that you are serious about your company and will likely work hard to protect your money and that of your lenders. Lenders will also want to see that you have more assets than liabilities and have the ability to quickly convert your assets to cash if necessary.
  • Conditions. Certain conditions beyond your financial history may contribute to your ability to secure credit. For instance, if a recession is expected to affect your industry, lenders might be wary about approving you for credit. But, if you can show potential lenders a detailed business plan and how a loan can help grow your company, it may help influence their decision.
  • Collateral. To guarantee your repayment of the loan, lenders may require you to provide collateral. If you are unable to pay back the loan, for any reason, lenders may recover their loan by liquidating assets securing your loan. Examples of collateral may include real estate, inventory, and equipment. Putting up collateral may help you get approved for faster financing, obtain a larger loan amount, or secure a lower interest rate than you would with an unsecured loan.

The following are important questions you should consider before you apply for credit.

Are you the principal decision-maker for your business?

If you are, we will ask you to complete and submit the loan application. If there are multiple owners of your business, at least two of them will need to submit their information with the application.

How long have you been in business?

Your financial performance over time is usually a fairly reliable measure of where you've been and where you're going. A longer history of successful business operation is relevant information for purposes of credit evaluation.

Have you filed for bankruptcy?

If either you or your business has declared bankruptcy this could impact credit decisions. The best way for you to re-establish a good credit record is to settle with your creditors as soon as possible.

Have you consistently paid your bills — both business and personal — on time?

Wells Fargo uses a business credit-reporting agency to see how you have paid your trade suppliers and other business obligations. We use a consumer credit-reporting agency to see how you have handled your personal debt. While an occasional late or missed payment is understandable, if you consistently pay late, you may not qualify for business credit. Sometimes you just need to set up an accounting system to ensure that you pay all your bills on schedule. If you find that you are consistently running short of cash, then you should take steps to trim expenses, increase sales revenues or raise equity for your business.

Is there a tax lien, suit or judgment against you or your business?

In the case of a tax lien or a legal judgment against you or your firm, the beneficiary of any settlement stands first in line for payment. The best thing to do before you apply for business credit is to pay and release all liens and judgments, and settle all suits.

Do you have five or more sources of credit?

Credit cards, lines of credit and loans are a key part of every individual's credit record. A strong credit history proves you have the willingness and discipline to repay debts. Lack of a credit record makes it much more difficult to borrow money. If you do not have credit today, secure credit soon and use it wisely. Good places to start include trade credit, credit cards, auto loans, home equity and lines of credit.

Is your business currently profitable?

Tax returns are a quick way to determine if you've shown a profit in the last few years. If your business is not profitable, it may be difficult for you to make the payments on your credit line or loan. So, if your business is not profitable, examine your expenses for opportunities to cut back and look at your sales for opportunities to increase revenues. Maybe you can sell more to a current customer. Or you might need more customers.

Does your business generate at least $1.50 in cash flow for every $1 in required debt payments?

Wells Fargo looks at the cash your business generates as the primary repayment source for the money we lend you. We compute the cash in your business by adding non-cash expenses (such as depreciation and amortization) to net profits. If your business doesn't generate $1.50 in cash for every $1 in debt payments, then you will need to look for ways to decrease expenses or increase sales to boost the cash in your business.