With the recent turmoil in the financial markets, banks and other financial institutions (called lenders) are further tightening their purse strings, especially to small businesses.
So, let's review the major factors that lenders always consider. If you and your business are strong in ALL of these categories, your chances of approval improve considerably.
Ability and Willingness to Repay:
First things first. You must be able to demonstrate your company's ability and willingness to repay a loan. Your ability to repay essentially means that your business is generating enough positive cash flow to pay the monthly payment as well as cover your general operating expenses. This positive cash flow can come from your normal operations or from some other source like purchase orders or signed contracts for a specific job.
Lenders also like to see that you and your business have paid past bills and loans as agreed and on time. This is typically accomplished by reviewing your credit reports. Yes, all lenders will review the personal credit reports of the owners of a company as well as those of the business, if any. Lenders may also call on your suppliers and other vendors to see how you have paid them in the past.
In the event that your company is seeking a loan to complete a specific job, the lender may also check the credit and past payment history of the person or organization that contracted you to complete the specific job.
FICO scores below 640 are immediate grounds for denial. FICO score should be in the 700s or higher. Anything in between is questionable.
Lastly, if your business is already carrying a lot of debt, lenders may baulk at your request. Lenders feel that you are simply working to repay loans instead of building the future of your company. The more you rely on debt, instead of equity, to finance your business the more risk you face and the higher risk for the lender. A quick look would be to divide total liabilities to equity. Anything 3.00 of higher is a big red flag.
If your credit or your business's credit has blemishes, you have two options. First, if the blemish was based on a unique situation, say medical bills, explain this situation up front. Being honest with your lender will go a long way in building trust and credibility. Second, before applying for a loan, work diligently to repair your credit. I would suggest starting with the credit reporting bureaus first. If you then think this is outside your expertise or just do not have the time, contact an organization that can help. A quick search engine search is all you need to get started.
Lenders typically like to see three (3) sources of repayment. The first and most important is cash flow - described above. Second, is usually based on the collateral securing the loan. Lenders look for assets that have resell values that meet or exceed the amount of the loan. Should the loan not have specific collateral (like an equipment loan) or is under collateralized, the lender will require a blanket lien against all the business's assets. As a third source, lenders typically turn to personal guarantees. This shows the lender that the business owners are willing to risk their own personal assets to grow the business. So, be willing to provide your potential lender with at least three sources of collateral.
Regardless of your business concept, if you cannot execute your plan, it will never work. Your business must demonstrate that the owners have the necessary expertise to run and grow this type of business. Managing a medical office does not necessary mean that you can design, produce, and sell software. If the business owners cannot specifically demonstrate that they have skills in marketing, management, finance, and accounting, then they must show that they have either hired these skills in house or outsourced these tasks.
If you and your business strongly meet all of these criteria, then you have a better than average chance of getting funded. Always remember, you will and should be turned down by many lenders before getting approved. Don't ever take rejection personally.
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