What are lenders looking for?
Banks and other lenders are interested in determining how likely you are to be able to honor the financial commitments you make to them. During the evaluation process for a small business loan, most potential lenders will use the following standard measures called the “5 Cs” of credit:
- Character. Your personal and business reliability. This can be assessed through your bill payment history, your career profile, your length of time at your current residence and other indicators of your overall stability.
- Capacity. Your cash flow and whether it is likely to be able to cover your expenses and the added burden of the loan payments you are seeking to take on.
- Capital. The net worth of your business, defined as the cash and other assets you have minus your liabilities.
- Collateral. Any assets you may have to secure a loan such as inventory, equipment or property. Lenders may ask you to secure a business loan with personal assets.
- Conditions. External forces—the economy, your industry trajectory and other factors—that may impact your ability to repay.
How will my existing credit impact the process?
Lenders assume that your history of borrowing and repaying is a good indicator of your future habits. Therefore, they like to see some track record of responsible borrowing and repaying, even if it has only been through the use of credit cards. Build or shore up your payment history by making timely payments on any existing financial commitments you may have before seeking financing.
What if I am just starting my company?
Part of your preparation for seeking financing should be to find opportunities to borrow and repay in order to build a good credit history. One easy way to do this is to secure a business credit card for purchases you know you can easily repay. A credit account with a supplier can also build a solid payment history for a new company.
How important is my credit profile?
A standard part of the evaluation process for any potential lender will be to “pull” your credit report, which means to access a report of your credit from one of the companies that tracks business and personal credit. An important part of increasing your likelihood of receiving financing is to review your report. Make sure your report is complete and accurate. If you have a credit issue, contact the credit agency and work with them to clear it up before approaching a lender for financing. The major credit report agencies include: Experian®Equifax®TransUnion® and Dun & Bradstreet®
What about my other bills?
In addition to looking at your history of borrowing and repaying credit cards and loans, a potential lender will want to see how you manage your payment of bills on a monthly basis. Your credit report from the credit agencies will tell this story based on the timeliness and completeness of your payment habits. To position yourself for success, pay utility, insurance and other bills before their due dates. If possible, pay the full amounts on your credit cards, rather than the monthly minimums.
Should I make any changes in my company spending?
A penny saved is a penny earned, and reducing expenses adds to your company coffers, which improves your overall financial strength. With this in mind, consider looking for ways to reduce your company costs as a way of shoring up your business profile before approaching a lender. This process can include reviewing vendor relationships to determine if you are getting the best deal, revisiting your spending on key business services to look for savings opportunities, and outsourcing functions you may have in-house to gain economies.
What documents will I need for the process?
A potential lender wants to understand your company, and financial documents are key to this process. You can ask the lenders you plan to approach exactly what they need before assembling any paperwork, but lenders will typically want to see the following documents: business and personal tax returns for three years; a balance sheet that indicates company assets and liabilities; and an income statement or cash flow projection, stating your revenue situation and what you expect in the near future. Your accountant can help you to prepare these documents. Some lenders will want to see an up-to-date business plan which explains your vision for continued financial success.
When should I reach out to the bank?
Establishing a relationship with a business banker before you need a loan or other financing may help you when it is time to ask for money. The simple reason for this is that a lender who knows you and understands your business is more likely to be able to support you during the process by recommending the right type of financing to ask for, determining how you can best position your company to secure the money you seek, and suggesting other steps that will enhance your likelihood of success.
Do I need to have a specific use in mind for a loan before getting it?
Yes. Lenders typically want to provide financing for a specific purpose. Even if you are getting a line of credit or other financing that you will tap into on an as-needed basis, a potential lender will want to know that you have a strategic plan for using the money you borrow. By explaining how the financing will specifically help your business succeed, you communicate that the funds are a steppingstone to success rather than just a means of covering expenses.
Successful procurement of the business loan you need is a step-by-step process that you can gradually work toward, as your schedule allows. Start today by preparing your company to make a great financial impression.
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