Considering a Business Loan? Know What Your Lender Expects Before Applying

Whether you’re just starting your first small business or you are an experienced business owner already, you’ll more than likely need some cash at some point during your venture. Here’s what lenders are looking for when they consider your application. Remember, this is a general idea that the criteria lenders will use. It’s essential to research each lender you’re considering to find out what will they require from you.

One of the most important factors that a lender would look at while considering a loan is your cash investment, if it’s a new business. Enough cash flow to make loan payments, if it’s an existing business, is also necessary. The more cash the business has on hand reduces the amount of the loan (obviously) and therefore, less risky for the lender. A new business has a disadvantage here because you can predict the cash flow and profits but you have no history to prove it. As an existing business, records of revenue help predict the success of your business.

Credit history, personal and business, is usually a major factor. Would you lend someone with a bad credit history? Check the debt to income ratio and make sure you’ve been making payments on time for at least a year before asking for a loan. If you don’t have a credit or have a bad credit, give some thought to clean it up and then consider the possibility of asking permission from a business partner or owner to take part in the responsibility of payments, should something unforeseen happen. This is often referred to surety or a co-signer in some businesses.

Management experience also counts when applying for a loan. For a brand new business owner, the type of business you’ve managed before is going to count. If you’ve managed a child care business before and you want to open a child care center of your own, then your experience counts, but if you want to open an auto shop, this could be enough to discount your management experience., Education and training are also factors, so be sure to mention these in your application. If your business is part of a franchise, mention it. Being part of a franchise gives your business a well-established foundation of experience in success and management. Of course, you’ll also want to provide proof of the franchise’s success.

Collateral for a loan is also considered in a loan application. If it’s a loan for business equipment for example, this can be used as collateral in case of default. You could also use the business itself.

The most important thing to do before you apply for a loan is to decide the amount you need to borrow and what kind of loan best fits your business’s needs. The Small Business Association has various loans and may have some different criteria for lending, although it isn’t a drastic difference from a typical lender. You may want to shop around and check out different lenders along with interest rates to make sure you’re getting the best deal. Good luck!

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