What Business Loan Lenders Look For

Obtaining a loan for your business isn’t a trivial task.  Lenders have a finite money reserve, so they’re not going to dole it out without careful consideration.  One big mistake small business owners tend to make is failing to consider what loan lenders look for or require from their applicants.

To help expose and prevent this error, I’ve compiled a list of common items load lenders look for.  This isn’t a universal compilation - some lenders won’t look for all items and other lenders will look for more.  That said, this is a fair cross section of items one should be prepared to provide when asking a lender for a business loan.  Without further ado:

1. Business plan

A business plan shapes a lender’s vision of your company - who are you and where are you going.  You should include monthly cash flow projections for the first 24 months to give the lender and idea of where your company is headed and whether or not it can pay off the loan.  Established businesses should show a schedule of current debt to show the lender that all prior debt can be reasonably handled and that your business pays debt back in a timely fashion.

2. Personal Credit History

Your personal credit history, including your FICO score, will give the lender an idea of how likely it is that your business will pay back the loan.  This isn’t entirely fair, as past personal mistakes can thusly haunt even the most conservative business owner.  But that’s the reality of the matter.  If your credit score is bad, work hard to improve it, or seek alternative types of loans.

3. Personal spending habits

Lenders look at personal spending habit (and financial habits in general) as a proxy for how your business will behave.  If you are loose and fast with your personal finance, a lender will assume (perhaps rightly) that the business you control will operate in a similar fashion.  Of particular interest to lenders are your credit card usage and handling of installment debt.

4. Balance sheets

Balance sheets are the barometer of health for your small business.  Lenders are going to audit your balance sheets, looking for any discrepancies or uncertainties that raise a red flag.  Double or triple check your numbers and ensure you’ve considered all financial aspects of your business.

5. Justification

This is, perhaps, the most one of the most important, yet undervalued, conaiderations a lender makes when determining whether or not to dole out cash to a business.  Lenders want to know the answer to the following questions:

If you cannot provide reasonable, justified answers to the above questions, it’s unlikely a smart lender, such as a bank, will provide your business the requested loan.  The stronger the justification, the more likely you’ll be able to obtain the full loan amount.

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March 27, 2009 | Entrepreneuer 

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