According to a new study by Gallup, commissioned by Wells Fargo, Black-owned businesses face tougher challenges than other groups when seeking bank loans. The report also found that the larger the loan request, the higher the rejection rate. Overall, 27 percent of applications for larger loans were turned down and only 7 percent for smaller ones.
We talked to Ramezia Watts, Assistant Vice President, Financial Relationship Manager II at Citizens Trust Bank, a Black-owned bank in Atlanta, Ga., to explain the differences between various bank-funding options and the best way entrepreneurs can increase their chances of getting funded.
When a business owner wants a bank loan, what is the procedure as soon as he/she walks into the bank?
They would need to complete a commercial loan application, provide three years of tax returns and/or financial statements, initially. After the initial phase, there are additional documents required, depending on the type of transaction. [The bank] provides the potential customer with a checklist of additional documents that are needed.
What is the ideal credit score to get a business loan?
The ideal credit score is a 700 beacon* or better.
Who is the ideal candidate for a business loan?
The ideal candidate is someone who has been in business for at least two years, with current financial statements, strong debt service coverage ratio (more income than expenses).
What is the different between a business loan, a line of credit and a business credit card?
The business loan can be an installment loan or a line of credit. An installment loan has a maturity date, where the loan has to be repaid by a certain agreed upon term. The line of credit is a revolving product, where as you pay the line down, you can use those funds again, without reapplying for another loan.
What is the best way that a new business can establish credit?
If the business is new, but has capital, they can secure the loan with their own funds to establish credit. This can be done with an installment loan, line of credit, or business credit card. This can eventually lead to a loan that does not require collateral.
*Beacon scores are credit scores, which are determined through a complex algorithm. These numbers tell the lender how likely it is that the borrower will repay the loan.