Small-Business Lenders Share an Inside Look at the Loan Process

Whether you have done it before or you’re new to the process, applying for a small-business loan can be frustrating and difficult to navigate. In the Federal Reserve’s 2023 Small-Business Credit Survey, over half of business owners who reported feeling discouraged from applying for funding cited lender requirements as the reason. With large banks in particular, a difficult application process was one of the top challenges borrowers faced, second only to high interest rates.

To help shed light on the process, we spoke with two small-business lending professionals — who together have nearly four decades of experience working with small businesses — about the funding process, what lenders are looking for and how business owners can approach lenders.

Responses have been edited for length and clarity. Learn more about each lender after the questions.

What components of a business’s financials do lenders look at?

Alexis Dishman (small business chief lending officer at Community Reinvestment Fund): Each small-business lender will vary, but many will look at the last several years of revenue to get a sense of how the business has performed. For example, is revenue going up? If not, is there a reason for the decline? A lender may use this information to evaluate growth projections for the business to ensure that they’re achievable and ultimately support the repayment of the potential loan.

Underwriters also often look at net income and losses and try to understand the drivers behind each measurement.

How does underwriting for business loans differ from personal loans?

Samuel Fuentes (loan officer at InterBank): Business loans use debt service coverage ratio (DSCR) that is calculated as an annual number to see if a deal will cash flow (if a business has enough cash to support the loan). Consumer loans use debt-to-income ratio (DTI) that is calculated as a monthly number to see if a deal will cash flow. This is because some businesses might be cyclical and a monthly calculation would be misleading for the business’s overall cash flow.

Why do lenders look at personal tax returns or income for a business loan?

Alexis Dishman: Underwriters will often look at personal tax returns to make sure income from the business isn’t funding a borrower’s lifestyle beyond the salary they take. Tax returns also help the lender identify any additional sources of income that could support the business, which could help improve chances of approval.

Should businesses expect to sign a personal guarantee?

Alexis Dishman: Personal guarantees are pretty typical with small-business loans because the owner is an integral part of the business’s success. As a lender it’s our way of asking them to stick in there with us. I kind of look at it sometimes as moral support, but it's really them putting their name behind the loan because we're partners in the transaction.

Samuel Fuentes: Yes, InterBank does require personal guarantees. For two reasons mainly. One, so there is a second source of repayment. Two, so that the owner has skin in the game. A business owner who isn't willing to sign on the dotted line with their business raises character issue questions.

What can small-business owners do to prepare themselves to apply for funding?

Samuel Fuentes: They should start talking to their lender and accountant about their plans to borrow. The team a business owner has around them should be connected and be able to help each other understand what the other needs to help the client succeed.

Don't be afraid to ask if you don't understand what the lender asks of you, or if you don't know how to fill something out.

What are some common mistakes that applicants make?

Alexis Dishman: One common mistake that applicants make when applying for a loan is not being upfront about past challenges, such as personal credit blemishes or business downturns. These aren’t always enjoyable topics to discuss, but being transparent with the lender is always a good idea.

It may seem counterintuitive, but by discussing past challenges with a lender, an entrepreneur may be able to highlight how they overcame these obstacles and better positioned their business for success in the long-term as a result.

Samuel Fuentes: Many applicants don't fill out their personal financial statement fully or correctly. This creates questions when it comes to figuring out the strength of the guarantor.

Some applicants try to turn in just portions of their tax returns or even try to send in transcripts only. The banks need the full complete tax returns to work loans.

What are some common reasons loan applications get denied?

Alexis Dishman: In some cases an applicant may not have sufficient operating cash flow to make loan payments or lack the collateral required. In other cases, a loan may be denied simply because an applicant didn’t complete the loan application. Before applying for a loan it’s important to understand the lender’s parameters.

Samuel Fuentes: Number one would be credit issues (current collections, past dues, etc.) with no explanation. Two would be cash flow (applicants don't have the income to support the loan request). Three, the collateral isn't sufficient to cover the loan request.

What do you recommend as next steps for applicants who are denied?

Alexis Dishman: If a loan is declined, I would recommend scheduling a meeting with the lender to discuss the reasons why. Once the applicant is able to understand the reasons for the declined loan, seek a technical assistance provider or business advisory service to provide assistance with making changes to the application or business framework that will make future applications successful.

Samuel Fuentes: It depends on the denial reason. If it's a credit issue, I tell them to work on paying things off or catching up before coming back for a loan. If it's cash flow, I tell them to meet with their accountant to discuss the business owner’s goals of borrowing, and find ways to increase write-offs that are add-backs, or discuss ways to find money for a down payment.

There are no quick fixes though — most of these solutions will push business owners at least to the following year for a loan.

What's your advice for a business that doesn't meet the criteria but still needs funding?

Alexis Dishman: I would suggest researching other lenders that the applicant's business profile may better align with such as community development financial institutions (CDFIs) or crowdfunding.

Samuel Fuentes: There are several alternative lending institutions and alternative ways to raise capital. CDFIs, hard money loans, private money loans, or sell equity in the company (ownership stake). These are just a few examples.

More about the lenders

Alexis Dishman is the small business chief lending officer at Community Reinvestment Fund (CRF), a nonprofit CDFI that aims to equalize economic opportunities by working with businesses that are typically denied capital access. She oversees all small-business lending at CRF and has previously worked at Bank of America and Comerica Bank.