A business lender looks at five basic factors look at before agreeing to loan you money for your business.
By: Hitesh Khan/
1. Credit history. One of the primary factors business lenders look at is the condition of your personal and business credit. This is reflected in your credit score. Before you even start shopping for a loan, request a copy of your credit report from all major reporting agencies. Review it carefully for mistakes, and resolve any discrepancies before you start the application process. Your personal credit score is associated with your personal tax number, but business credit reports are tied to your corporate tax number.
A business lender will want to review both the credit history of your business (if the business is not a startup) and, because a personal guarantee is often required for a small business loan, your personal credit history.
If you discover any inaccuracies or problems, you can correct them before any damage to your loan application has occurred. If you can, find out which credit reporting company your prospective lender uses and request a report from that company.
Before you apply for commercial credit, you should review a credit report on your own business, if your business has been in existence for a while. Most conventional lenders will expect a minimum of four or five trade experiences listed on a business report before they consider the business creditworthiness. If you have been operating your business without credit, or with personal assets, you should consider making some trade credit purchases in order to establish a credit history for your enterprise.
Consumer credit agencies are required to remove any information from the report that cannot be verified or has been shown to be inaccurate. However, before you submit a letter disputing any debt to the credit reporting company, it’s often a good idea to contact the relevant creditor directly. If an error was made, you can often clear up the dispute more quickly if you take the initiative.
If the dispute is not resolved and your credit report is not adjusted, you have the right to file a statement or explanation regarding the alleged debt with the credit report.
2. Vested interest. Business loan applicants should have a reasonable amount of equity invested in their businesses.
When they see that you have invested a substantial amount of your own money in your venture, they will assume that you will work hard to make it a success. Also, strong equity with a reasonable amount of debt can help a business weather tough economic times. Little or no equity leaves a business vulnerable, increasing the risk of default.
3. Working capital. Working capital is your current assets less your current liabilities. Working capital can also be thought of as cash on hand, or what is available to pay current debts and keep your business running. A lack of adequate working capital increases the risk that your business will fail, and makes business lenders much less likely to issue you a loan.
4. Ability to repay. A business lender want to see two sources of repayment: cash flow from your business and a secondary source — typically collateral. Lenders will look at your past financial statements, including those of any business partners. They will want to see your:
- Personal assets and liabilities
- Personal tax returns for the past three years
- Balance sheets for the past three years
- Profits and loss statements for the last three years
- Accounts receivables and payable aging
If your business has consistently made a profit, you are more likely to get approved. But if your business has not been consistently profitable, you can increase your chances of getting a loan by including detailed information of new opportunities, new contracts, or other information showing that your company is not a “risky business.”
Many lenders also require evidence of collateral. Collateral can be business assets and personal assets outside the business. If you plan to purchase equipment and other assets with borrowed funds, you can assume that this will be used as collateral for the loan.
5. Experience and character. With a few exceptions — franchises are a notable one — you should have experience in the type of business you plan to run. If you don’t, lenders may expect you to hire or partner with people who have appropriate experience. At the very least, you should be able to point to business acumen and managerial experience.
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