Bank Rating, FICO SBSS

Every business has what is commonly called a "Bank Rating". Lenders use the business bank rating to determine if a business has the ability to debt service. A bank rating is the average daily balance of the business general ledger account over the last three-month statement periods.

Bank ratings have two components:

• The first, being the terms; Low or “L”, Medium or “M” and High or “H” “Low” means that the account average daily balance for the past three months started with a 1, 2 or a 3. Accordingly, Medium means the account average daily balance started with a 4, 5 or 6 and High the account started with a 7, 8 or 9.
• The second, is a number value such as; 3, 4, 5, 6 or 7. This is an indication of the number of digits that the account average daily balance for the prior three months consisted of such as, “4” would indicate four digits or $x,xxx. Therefore, a bank rating on M4 would indicate that for the last three months the average daily bank balance in the business general ledger checking account was $4,000, $5,000 or $6,000.

Most lenders never want the total debt monthly payment obligations to exceed 35% of the business' available cash working capital. Therefore, if the current debt was nothing ($0) and the bank rating was a M4 most lenders will default to 35% of the lower indicated value or $4,000 and allot 35% of that as the maximum payment availability for servicing debt or roughly $1,400 a month for the max payment amount.

So, what happens if the business has a “Low 3”?

This would indicate that the average daily business bank account balance for the last three months was only $100, $200, or $300. To lenders that indicates that the business has no ability to debt service and therefore any loan applications will be declined. At this point anything the business is approved for will most likely be based solely upon the personal credit and personal financial condition of the business owners and not on the business itself.

Therefore, creating and maintaining at least a “Low 5” bank rating is vital to a business getting approved for business loans and to the ultimate goal of the business becoming bankable. Creating a “Low 5” bank rating requires that it is never allowed for the business general ledger bank account to drop below ten thousand dollars ($10,000) not even for one day. Consider this the floor for any business bank account. Business owners should borrow the money personally if they have to and loan it to their business until such time as the business is able to support maintaining that $10,000 as the floor of the business general ledger checking account.

Business owners might even consider borrowing the $10,000 from friends or family by letting them know that they will not be using the money, but instead it will be used only as a floor in the business bank account to help create a Low 5 and explain what that means. They could assure them that if the business is unable to obtain a business loan within six months that it will simply return their money. Maybe offer to pay an above going rate of interest. There are other ways to get the needed $10,000, such as credit union loans, cash out credit cards, using personal assets and more.

The business bank rating is going to be a major factor in the business FICO Small Business Scoring System (FICO SBSS). This scoring system is now used extensively by banks, credit unions, the SBA and many other cash type lenders. Businesses need to develop a FICO SBSS of at least 160 as part of the goal to become bankable and have the ability to get approved for much larger loans at lower interest rates and longer repayment periods. The business bank rating along with a few other financial factors can make up as much as thirty percent (30%) of the business FICO SBSS.