Lending institutions welcome the opportunity to lend money to small businesses, but they prefer those with good credit. Before they encourage borrowers to click here to learn more about their financial products, they want reassurances that the money will be repaid.
There are several ways that you can go about providing this proof for your business. Financial statements that show profits in previous years, a listing of assets and future growth projections all look good with a loan application.
Even better for lenders is how well you pass the Five Cs test: capacity, character, capital, collateral and conditions. A solid representation of these criteria determines the overall risk of approving your loan.
Capacity to Repay the Loan
The ability of your business to repay the loan may seem objectionable. Of course, you are not borrowing with the intent of never paying back the money. You expect your business to be profitable enough to honor the debt.
Nevertheless, a lender looks at the financial history of your business to determine if you have a pristine repayment record.
Reputable and Trustworthy Character
Not only is the financial history important, but lenders also want to know the reputation of your business within the industry. Your character, as well as the business, should not be questionable. Never underestimate its importance.
It is not easy to get approved for a loan if you have avoided investing in your business. Expect scrutiny from the lender on how much – and how often – you chose to put your money on the line to grow your business.
Considered the most important criterion to getting approved for a business loan, collateral reassures the lender. If your business defaults on the loan, the lender can use equipment, inventory, accounts receivable and other business assets to satisfy the debt.
Favorable Industry Conditions
The lender will often want to know why your business needs to borrow money. Current market trends in your respective industry factor into whether granting the loan is a good idea. Typically, the lender will evaluate the purpose for the loan and the general economic climate.
While lenders will evaluate each of these factors against your loan application, none can individually guarantee that you will get the financing or be denied. Still, each one demonstrates your seriousness in doing business successfully.
If securing a loan seems impossible, you could look into nontraditional funding sources like asset financing to get the money you need.