XBanker

Not All Industries Are Created Equal

May 27th, 2008

When you are applying for a small business loan or unsecured line of credit at a bank, why do they ask you about your business’ industry? Does it really matter what type of business you run? If you have a history of business success, have stellar business and personal credit, an impeccable resume, and even an outstanding team behind you, the industry you are in shouldn’t play a role in the approval decision, right?

For better or for worse, the truth is that the industry you are in will play a fundamental role in the bank’s decision on whether to lend you money.

Each bank makes their own decision on which industries they “prefer” to lend to, which ones are a little “higher risk” and those that are “restricted”. Even though every bank writes their own rules, there are some generally accepted industry guidelines you should be aware of. The intent of this post is to explore these guidelines, and why banks make these distinctions.

The most basic principle of lending is that more approvals are a direct correlation to lower perceived risk. The more you have invested in your business, the less likely you will be to give up on that dream. Banks like to see you heavily invested! If there’s a discernable chance you will give up on your business in 2 months, your chances of getting some bank to lend you money is slim to none. If the bank determines that it is likely you will give your life for your business and do whatever it takes to make it succeed, then your chances of getting money increase. But what does this have to do with industry?

All banks have identified industries that they “prefer” to lend money to. These preferred industries are perceived to be lower risk. Most of these industries are professionals like Doctors, Dentists, Accountants, Attorneys, etc; people who have earned licenses and/or have gone to school for an insane number of years in order to pursue their business. If I had just graduated from college after 8 years of studying to be a dentist, what are my chances of quitting 2 months after I open my practice? Of course it’s possible, but it’s highly unlikely. Banks employ the same mindset. Generally, professionals have so much of themselves invested in their company, (time, money, etc), that they won’t give up when they hit their first obstacle. The nature of entrepreneurship is that we will inevitably have hard times; the chances of us and others in our industry sticking it out will ultimately determine what risk category the banks place us in.

Some “high risk” industries include Consultants, Investors, Real Estate Professionals, Financial related companies, etc. What does it take to be an investor or a consultant? The answer to that is absolutely nothing. It really doesn’t require one day of schooling or one penny (in most cases) to carry around a business card that says “Consultant”. Lenders understand this and that’s why these types of industries fall into the “high-risk” bucket. This doesn’t mean that banks won’t lend money to this group, because they dish out money every day to these industries – it simply means that the underwriting guidelines will be raised a bit from the “preferred” level. Instead of requiring 2 years in business for a preferred industry, the same bank might require 3 years. Or maybe the credit requirements will be 20-50 points higher. If you find yourself in the “high-risk” category, all hope is not lost; you just need to be a little more prepared before you ask the bank for money.

Each industry category could have hundreds of different types of businesses. I’ve given you only a few examples here to illustrate that not all industries are equal in the eyes of lenders.

Tip of the Day: You need to understand which industry bucket you fall into BEFORE you ask the bank for money. The steps you will take to get prepared for your loan or unsecured line of credit will be different depending on how risky your industry is. Remember, if you are declined for financing, you are basically shutting the doors to that particular lender for about 6 months. It’s better to take a few weeks or even a few months to make sure you are ready before the door closes.

So, how risky does your industry make you look?

One Response to “Not All Industries Are Created Equal”

1. Tomas Says:
   May 27th, 2008 at 12:31 pm

   Very interesting and informative article. By chosing the neutral name, you can actually built a little playfield to maneuvre.
   Example : Royal Garden Management,inc
   division of Lawn& garden

   retail — we selling parts & equipment
   Consumer services– we repairing and do the warranty services
   Consultants–we advise the consumers how to take care of it..
   Financial–we provide inhouse financing for our equipment sales

   The guys in the bank don’t really need to know, that I am basically fixing cheap, junk lawnmowers, do they???

   Well make your industry pick mr.X….LOL

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