Its isn’t that your banker does not want to lend money to you, rather he wants to determine what risk you pose as he considers your loan application.
The following are six areas that your banker will consider when weighing your loan application:
1. Business and/or personal creditworthiness – You have your personal credit history, but what about your company? Is your company’s credit history very good? How does your personal credit report look? Your banker will base his lending decision largely on how well your business handles credit. Further, your personal credit history may be used if your business history is spotty and you apply for a loan with your Social Security Number and not your Employer Identification Number. Obtain copies of your D&B report and your personal credit reports to ensure that you are not blindsided by a surprise loan rejection later.
2. Business property – Do you own or lease your property? How have you been handling payments to your landlord or bank — are you up to date with your payments? What is the current worth of the property? How much equity do you have on hand? Is there adequate insurance coverage in place? What is the building’s current condition? These are some the questions your banker will want answered as you seek a loan. He may make a personal visit to your property to verify your claims too.
3. Business equipment – If the loan request involves the purchase of new equipment, what would be the present and future value of that equipment? How fast will you depreciate it? What type and amount of insurance do you have on your equipment? Sometimes bankers will offer chattel mortgages on equipment, which could include a delivery truck, computer or anything that can be moved. Investopedia describes a chattel mortgage as, “… a loan arrangement in which an item of movable personal property is used as security for the loan.” It is a loan that is secured by chattel or in this example your business equipment.
4. Business accounts receivables – If you have significant outstanding accounts receivables, then a bank business loan can be based on the funds that your customers owe you. Essentially, the bank gives you the money up front; when the receivables come due the bank collects what is owed directly from your customers.
5. Business assets – Beyond your business property and equipment, your banker may want to know what other assets you own. These assets can include savings, shares in other companies, intangible assets and intellectual property.
6. Business profitability – If your business does not make money or is part of an industry with small profit margins, you may find it much more difficult, if not impossible to secure a bank business loan. Although your banker may personally want to extend a loan to you, he still needs some assurance that your business will be around for the long term and that your loan will be paid off. If you do receive loan approval, you may discover that the terms are different with a quicker repayment period required. Plus, your bank may ask for regular financial statements to ensure that your business is financially strong.
Your lender isn’t out to give you a hard time. Indeed, if you are financially able to pay back your loan, you stand a good chance of getting approved. Look at the banker’s review of your business finances as a positive matter, one that can help you uncover problems and address them before they get out of hand.