The Nations’ Capital Five factors in obtaining a business loan

VISTA, Calif. – The U.S. Small Business Administration reported that 6.4 percent of “American Indian, Eskimo or Aleut” people were self-employed outside the agricultural sector in the decade between 1990 and 1999. American Indian-owned businesses ranged from high-tech to heavy construction, personal and professional services.

A critical part of starting and sustaining a business is financial capital. Many people dip into their own savings or take out personal loans. Some look to family and friends; others seek institutional or venture capital for financing. Certain businesses started by enrolled members of federally recognized tribes may qualify for federal domestic assistance grants. (See CFR title 25, parts 26 and 27.)

Many people become entrepreneurs because they like having control over their business. They frequently request bank loans to finance their business. Lenders generally consider five factors with business loans: credit history and credit score, vested interest, working capital, ability to repay and experience of the principal(s).

Credit history reports the timeliness of payments. Individuals and businesses are tracked by the three bureaus: Experian, Equifax and Transunion. Social Security numbers are used to track individuals, while employer tax identification numbers are used to track businesses.

The bureaus research and report liens and delinquency data from the Internal Revenue Service, state taxation authorities and lending institutions. If a person has a credit card, or takes out a mortgage or a car loan, the history of payment and such details as the credit limit, timeliness of payments, foreclosure and collections will be recorded. A good history is favorable.

A credit score is a number that reflects a borrower’s loan payment pattern, measured against the behavior of 1 million borrowers. It factors in length of employment at the present job, credit balances, homeownership, length of residence in current home, professional versus other occupation, debt utilization, number of recent inquiries by lenders, length of time on a credit bureau’s database and the amount of credit lines opened.

All things being equal, a professional such as a doctor or lawyer will have a higher score than a blue-collar worker. While credit bureaus would not like to admit it, common sense could explain that a doctor is less likely to be laid off than a drywall hanger in an economic recession.

Length of residency and employment indicate a person’s physical stability. A homeowner who has been at the same job would appear to be more stable than a renter who jumps from job to job.

Debt utilization measures how much credit the borrower uses. If someone has a credit limit of $10,000 and a balance of $5,000, debt utilization would be 50 percent. This gives lenders a clue as to future credit usage.

The number of inquiries is interpreted as the desire to borrow more money. Someone may apply for a mortgage with different lenders. When this happens, the borrower may end up with more loan inquiries than actual loans.

Having a long credit history helps. People are creatures of habit. Long histories can show borrowers’ payment patterns over time, through life events such as job layoffs or changes, marriages and divorces. A person without credit will have a lower score than someone who owes money on a credit card but who has a good payment history. This is because the person with credit has demonstrated the reliability of payments.

Lenders also look at vested interest of the guarantor. The higher the percentage of ownership, the more the institution may think the loan will be paid. For example, if a business had a bad month and could not pay the loan, the majority stakeholder is more likely than a minority stakeholder to dip into his pocket to subsidize the loan.

Working capital is the difference between current assets and current liabilities. It is a measure of a business’s ability to pay current bills. Technically, it is the difference between what a business can quickly convert into cash and pay bills owed to suppliers and creditors. A large working capital relative to current liabilities is a healthy sign.

Ability to repay is a projection of cash flow and profits from the business. First, the business must make money. Then it must be able to collect. In some business, political connections or support to sustain a contract can be a factor. For example, a business may have a contract with a tribe. However, a new council may rescind the contract. This could have a negative impact on the borrower’s ability to repay a large capital loan. In this case, lenders look for guarantees that can transcend the political changes.

Experience of the principal(s) is a qualitative factor. This is a subjective evaluation of people who will be running the business. A scientist may be good at studying and analyzing, but lacks the skills to manage people in the business. A team with principals who have complementary talent and experience is perceived to be stronger than one without.

Lenders can be flexible in these requirements. Unfavorable factors such as illness, job lay off and divorce are real facts of life. These events can lead to poor marks on one’s credit. Fortunately, lenders are in the business of making money. If circumstances have changed and payments are restored, many lenders are willing to adjust the risk with an increase in interest rate, ask for a co-signer with the requisite credit factors or accept real estate as collateral.