Small Business Lending: The Awkward Middle Child of Banking Products

April 15, 2012 by  Filed under: Credit 

Some products in the financial industry are relatively standard–they are similar across banks, consumers know what information they need to apply, and for each individual bank, applications for the same product use the same kinds of information. This is typical for fairly common products like low limit credit cards and even for highly complex products like corporate loans. Small business lending, however, does not comply with the same norms. Banks may need different information depending on the size of the business and each bank can define small businesses differently. What is it exactly that makes small business lending different than other lines?

Simply put, small business loans and credit cards are in the fuzzy gray area. Credit cards, DDAs, and other kinds of loans (auto, education, etc.) are explicitly held by one entity-a person. There can be multiple people on these accounts, but the primary is acting in their own name. More complex accounts are the same way–a corporation can take out a loan, they are acting for themselves as an entity, and the credit history of the corporation is analyzed for credit worthiness. With a small business loan, the consumer takes out the loan in the name of the business, but their own credit history is analyzed. If the business is bigger, the credit history of both the individual and business are analyzed. Either way, these kinds of loans are caught in the middle between the personal guarantor and businesses acting independently as an entity.

What are the differences between the actual small business processes, then? When a business is small and the loan is taken out in the name of the business owner, the credit file pulled is for the individual. The loan is predicated on the history of the owner as a consumer. If the loan is taken out in the name of the business, however, the bank has a few options. Pull the consumer report first, then the business credit file; pull the business credit file, then the individual credit file; or simply pull only the business credit file. In the first two instances, if either of the reports comes back as a no hit, the other file can be manually reviewed in order to make a decision. In the last instance, however, if the report comes back as a no hit, the personal guarantor must present their file or the application will be denied.

Small business lending is unique because the loan can be decisioned on either the credit file of the individual or the credit file of the business entity. This is dependent on size of the business and whether or not information exists about the consumer and/or business. These kinds of loans are highly dependent on each individual circumstance, and really are caught in between being a personal loan a corporate loan.

Kelty Wallace is a SEO specialist and copywriter for Zoot Enterprises in Bozeman, Montana.

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