At some point or another, many businesses will consider obtaining external funding to help them reach their goals. Investing in brand-new equipment, supporting expansion plans and managing cash flow are all common reasons behind applications for business loans, but it’s wise to understand the factors lenders weigh up when deciding whether to approve them.
While lenders primarily make assessments based on a firm’s ability to repay, here we examine what they look for in detail on receipt of a business loan application.
Financial health
Lenders always examine a firm’s financial health, considering cash flow, assets and profits. This typically means they need to see key documents like annual financial statements, tax returns, balance sheets and company bank statements. This documentation provides important insights into a firm’s liquidity, profitability and overall financial standing and can prove robust profit margins, steady revenue growth, and effectively managed expenses that reassure lenders companies can repay what they borrow.
Creditworthiness
As part of every loan application, lenders will assess business credit scores. These ratings represent a firm’s financial history and how it makes payments. Lenders use them to assess the likelihood of a firm making timely repayments.
A sound record of managing finances responsibly increases the chances that a business loan will be approved. Although it is advantageous for applicants to have no negative marks on their personal credit score, when applying for a business loan finance lenders will be more interested in the business’s credit score.
Business plan viability and loan purpose
When applying for a business loan, it is important for companies to clearly explain their plans and how the funds will be used if approved. Lenders will want to understand how the loan will contribute to the firm’s growth. For instance, whether the loan will support investment in a new project, fund hiring more employees or pay for company assets. A detailed and clear plan that looks viable can boost lender confidence regarding the safe return of their investment in repayments.
Collateral offered
Finance lenders sometimes need personal guarantees or collateral as security in case a borrowing business defaults on its loan. There are many different examples of collateral including physical assets like property and expensive equipment.
However, a personal guarantee is another form of security where a business owner promises to personally repay the debt if the business cannot. In many cases the business owner must also be a homeowner so the personal guarantee they offer is supported by a tangible asset.
Supplying a personal guarantee or collateral can not only increase a firm’s chances of a business loan being approved, but also let them access better terms.
Overall market conditions
The sector a firm operates in and the current market conditions it faces can play a substantial part in the decision-making process. Often, lenders assess the growth potential, stability and trends in the applicant’s industry. When businesses borrowing provide a detailed analysis of their market, including target customers, competition and possible risks, it can demonstrate understanding and the capacity to manage challenges. It is worth noting that many lenders and the loans they offer are designed for specific professions and industries.
Debt to-income-ratio
When applying for a business loan, lenders will evaluate a firm’s debt-to-income ratio. They use it to compare a company’s income to its current debt obligations. The lower the ratio, the healthier financial position a firm is in and the greater its ability to manage further debt. The debt-to-income ratio is a critical factor for lenders to work out home much debt a firm can reasonably handle.
Are you seeking a business loan?
As we have explored, lenders consider multiple factors when determining whether a business is eligible for a loan. An easy way to remember the key criteria they consider is to remember the five Cs. Character looks at a company’s reputation and credit history, while capacity examines its ability to make repayment on time by reviewing financials and cash flow. Capital considers the loan applicants personal investment in the company, and conditions relates to the purpose of the loan and its viability against the industry outlook and economic climate. Finally, collateral involves any assets or guarantees offered as security for the loan.
At AJL Finance, we help small- to medium-sized enterprises secure business loans that meet their needs. Complete our eligibility checker today to proceed.
