Nov 25, 2020

10 Factors Lenders Consider in Your Business’s Finances

Applying for small business loans can seem like a hassle, but funding is necessary for most businesses to grow. The process becomes less frustrating when you understand where the lenders are coming from, though. Here are a few elements of your loan application that lenders will be eyeing closely.

1. Ability to Fill Out the Form Correctly

The very first thing a lender will check is if you filled out your loan application according to their instructions. Botching your application may not guarantee your disqualification, but it is a terrible way to start. Read over the entire application before filling anything in, and then double-check once you finish. You would have second thoughts if you were hiring and a candidate couldn’t even fill out a job application correctly—lenders think the same way.

2. Your Personal and Business Credit Scores

Your credit scores carry a huge amount of weight for lenders. They will look at both your personal credit score as well as the score for your business, although the latter may not exist if your company is extremely new. Ideally, your personal credit score should be at least 700, but the higher, the better. Business credit score systems vary—generally you want your score to be over 80. Getting your credit scores in order should be a priority before you fill out any applications.

3. Your Business Plan

In most circumstances, your loan application will live or die based on your business plan. Not only do you want to create and update a solid business plan to impress lenders, it’s also a necessary document to keep your operation healthy and forward-looking. A thorough business plan shows that your business is prepared for the future, even if the economy lags.

4. Age of Your Business

If your business is less than 1 year old, it will be difficult to find a lender: it’s hard to argue that your business idea is a winner when there is no track record of its success. Generally, if you need start-up funds, most entrepreneurs look to their own savings, friends, family, or angel investors. Lenders may be interested, though—especially if you have experience or the idea is particularly hot.

5. Your Cash Flow Situation

Lenders will study the cash flow statement of your business plan very closely. Cash crunches—times where expenses overwhelm cash on hand—can be fatal for small businesses, especially in the early years. You want to show that the company has enough cash coming in on a regular basis to make payroll, buy necessary inventory, and pay rent.

6. Risky Industries

Lenders will want to understand what industry your business fits into. They get applications for all sorts of ventures, and they generally have an idea what types of business are safe investments. Restaurants, construction, and farming have proven to be risky industries. You can potentially get over this skittishness with a good credit report and solid business plan, but you should research to see how lenders feel about your industry overall.

7. Collateral

Most small business loans are secured loans, meaning that the lender will want you to have some skin in the game. They will look for your assets, such as property, vehicles, or equipment, to collect in case you default. Before starting the search for financing, list all of your business and personal assets. Think about what you would be willing to forfeit in order to get a loan—probably privileging business assets over personal ones.  

8. Debt Utilization

If your business already has a lot of loans, you’ll understandably be seen as a riskier investment for new loans, even if you keep up with your loan repayments. Debt utilization—the ratio of how much debt you have versus how much credit is available to you—is a critical criterion that credit bureaus use to decide credit scores. Lenders also look at this data, and they’ll get squeamish if you’re using too much of the credit available to you.

9. Whether the Investment Is Worth It for the Lender

On top of everything else in your application, lenders will fundamentally ask themselves 1 question about your business: is the potential return worth the investment? It costs money to lend money, after all—so if you’re asking a major lender for a small amount of money, it probably isn’t worth it for them.

10. The Amount of Money You Asked For

Lenders pay close attention to the size of the loan you’re seeking. If it seems too large, lenders will think it’s too risky. If it’s too small, it isn’t worth the effort for the lender. Think hard about what amount of money will help your business to expand sustainably.

About the author

Barry Eitel
Barry Eitel
Barry Eitel has written about business and technology for eight years, including working as a staff writer for Intuit's Small Business Center and as the Business Editor for the Piedmont Post, a weekly newspaper covering the city of Piedmont, California.

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