An important part of getting your requests approved by a lender is knowing what they are looking for so that you can be proactive and be ahead of the game.
There are five factors that lenders look at when reviewing a business loan application:
First, lenders must know the borrower’s net worth. This is obtained by the lender by asking the borrower to complete a personal financial statement.
Lenders’ measure the borrower’s liquidity or ability to meet short term debts. After all, if you cannot pay your short-term debt, how can you pay your long-term debt.
The lender looks at many ratios but two of the most popular are the current ratio and the quick-acid ratio and they have set standards of what will be an acceptable ratio or not.
Free Cash Flow
Free cash flow from operations is a critical measure for lenders. It shows if the business is generating positive cash flow. Negative operating cash flow shows that the business is not even able to pay the business operating expense with the revenue generated. These are important areas that lenders look at when reviewing a business loan application.
Credit score and History
Aside from the capacity to pay which is discussed from the previous three points, the lender also looks at the qualitative factor which is the willingness of the borrower to pay and that is measured through the business and personal credit profile of the applicant. Past behavior is an indicator of future behavior and if the borrower has in the past failed to meet their obligations, this is something that lenders seriously consider in their review.
This can be somewhat of subjective measurement but does come into play. Have you proven an ability to successfully run a business? Borrowers must not only show a high net worth, adequate liquidity, and strong credit scores, but they also must convince the lender that they are capable of making sound business decisions and managing money and personnel.