Financing Your Small Business: What Lenders Look For
For most, starting and growing a small business isn’t a solitary activity. You need the knowledge and resources from others who may have experience and expertise in areas that you do not.
Often when business owners are starting out, they’ll seek capital from a lender and be turned away, either because they weren’t aware of all requirements or weren’t in an adequate position to receive that funding. Being turned away from a lender is a completely avoidable situation, and we’re happy to work with you to make sure that scenario never comes to fruition. There are many ways to ensure that your business is prepared to receive new funding, and we can teach you exactly how to understand and prepare for the process of securing new capital.
To get you started, here are 5 things lenders look for:
1. Business Plan
The first key piece that a lender will be looking for is a strategic business plan which will indicate that you’ve done your research and due diligence in planning and evaluating the market for a viable business idea and growth plan. This should include financing plans, an industry analysis, competitive research and more to illustrate the viability of your company.
3. How you’re going to use the loan
Lenders will also want to know how you’re going to put your loan to use. Often for small businesses seeking financing, you’ll be working with a lender in your local community and they can sometimes be more motivated to support a new business venture that will be doing good for their own community. For example, if you plan to use your loan to add a new healthcare facility in an underserved location that has the potential to make a huge, positive impact on your community. This kind of initiative can help to sway a lender who sees the need and value of what you’re offering — and most importantly, the good that your business will do for the community.
3. Capital and Collateral
It’s important for a lender to know how much capital you have already put into your business so that they can determine whether you are truly invested in and committed to its success. Positive Cash Flow is an indicator that you have enough money to cover your loan and that your business is not at risk of closing.
Collateral is what you would offer up as repayment should you not be able to meet the payment terms of your requested loan. This can include things like real estate, business assets like equipment, vehicles, and products, or even some of your business accounts. Being able to show that you have adequate collateral should your cash flow fall short is important so that the bank knows their investment is protected. Check out our guide on 4 ways to improve your cash flow if this is something you’re concerned about for your business.
4. Credit History and Capacity
Lenders will also look at your credit history to evaluate whether you or your business might be a risky investment. They like to see that you have a strong credit score and a history of on-time payments. If you don’t, you’d be wise to spend some time rebuilding your credit history before applying for a business loan because this is one of the primary reasons that you may be turned away.
They will also use your credit history to score your current debt. They use this information to understand your capacity to take on more debt, meaning that your revenue percentage per dollar of debt isn’t so low that, with additional lending, you might be unable to pay back the new debt.
This is more of a “soft” requirement than a “hard” one, but many banks and credit unions will evaluate the reputation of a business, and even the business owner, within the local community. This means they look will at your company’s history, and sometimes even seek references. Having business references who can vouch for you, perhaps from a small business consultant who also has a personal relationship with a lender, can be a powerful way to sway a bank.