A friend of mine runs a business loaning money to businesses. Every once in a while, he asks me to baby-sit a file for him or to help him interview a potential borrower (I don’t loan the money, my job is to vet the candidates who needs loans if he is really busy and I have some free time- yes, I need a life but, in my defense, it is a good way to learn about businesses). If you sit through enough loan interviews and hear enough stories of why a business needs a loan, you begin to pick out a discernible pattern between the desirable borrowers, the undesirable and the “not on your life” borrowers. With lenders increasingly tightening loan criteria, to the extent that the student loan market has nearly collapsed in the United States, what are some things to avoid if you are looking for a loan of any kind beyond the obvious factors such as bad credit score, no documentation etc.?

• “I would like you to loan me a lot of money based on the fact I am nice/the business idea is great but I will put no money in it myself.” Lending is the management of leveraged risk (remember that lenders have lenders too so they are leveraging themselves). The best way to mitigate lending risk is to make sure the borrower shares in the risk by putting in their own money (aka “skin in the game”). If you put no skin in the game, you are telling the lender you have no confidence in yourself or the business (put your money where your mouth is). Even a token contribution from a borrower with little assets goes a long way to showing a lender you are willing to share the risk. One of the few situations I know of where the borrower doesn’t have to put any meaningful skin in the game is the 40 year mortgage and these are walking car-crashes for lender and borrower alike.
• “Sorry, you have the wrong lender…” Make sure you target the appropriate lender. This sounds patently obvious but not all lenders are built equally. The quick and dirty on loan sources are:

• Credit Unions: Good for personal and small business loans; not the best source for larger commercial loans
• Banks: They like loans where there is a lot of collateral. For example, historically, mortgages or commercial real estate and RSP loans. Like unsecured lines of credit and credit cards. Hate student loans, small commercial loans (unless backed by the government). Each bank also has their specialty.
• Private lenders: Typically, higher risk borrowers with sufficient collateral (a 2nd mortgage on an appreciating home or rental property).
• Angel investors/venture capitalist: High flying businesses which have the chance of going public.

• Bad Attitude. Lenders are people too. You may look great on paper but if you have a bad attitude, there is a disincentive to lend money to you. If you are difficult to work with now, and the money hasn’t been even loaned, what happens if you fall behind on payments? I know lenders who may have rejected a borrower but because they had a good attitude, actively helped them find another lender.
• Unreliability. Your parents were right. If you keep moving jobs, cities and spouses (!?!), you look like a flight risk and less likely to get a loan (not to mention all the neighborhood gossip your parents have to deal with arising from your fickle ways).
• “I need cash quick” Total red light for a lender. Why do you need cash so quickly- who or what are you running from?

Good luck with obtaining a loan.