September 28, 2015
Smarter Small Business Lending: Preparing to be Approved
Whether you’ve been working for years to expand your business or you’re just getting started, loans are essential for taking your ideas to the next level. Every loan is different, because every company is different. Even if you own a small business, it doesn’t feel small to you – it’s everything. And sometimes you need money to make money.
So what’s the secret? What do successful companies often have in common?
Most small business owners enter into the lending process with a strong idea of where their company stands financially. They’ve crunched the numbers, done the math and think there’s no way they won’t be approved. But what some fail to consider is that there are many variables at play when it comes to getting a loan request approved, and preparation is key.
What should you be prepared for? When it comes to reviewing a loan request, banks will consider the following:
The 5 Cs
Who is the person behind the business? Who is going to be guaranteeing the loan? Think about the individual from a banker’s point of view – Are they financially prudent? What’s their credit score? Do they have a desirable debt to income ratio, as well as liquidity? Just like you want an executive to be the face of the company, find the right person to be the face of your loan.
Cash flow is very important. Make sure you have the capacity to repay your obligations, and be ready to explain your strategy.
At Beneficial, we love it when a company shows vitality. What’s vitality? We see it two ways –First, we look at the equity down payment from the borrower to purchase real estate, equipment or a business. How strong is it? Second, we examine the equity and earnings that a borrower retains in the business. How strong will it be afterwards?
Other than cash flow, collateral is often times a bank’s secondary source of loan repayment. It’s wise to provide banks with a first lien position that has net coverage of at least the amount of the loan requested.
Finally, a lender will look at the structure of the loan – it needs to make sense for both the lender and the borrower. As previously stated, if the purpose of the loan is clear and the borrower and lender’s goals are aligned, it will be favorable to building a successful lending relationship.
What are some other ways to be prepared? Talk to us – we're looking forward to the conversation.