Business Loans & What Lenders Want To See.
Not all lenders are created equal, but many of them focus on the same areas throughout the loan review process. Learn what documentation, projections and narratives you’ll need to prepare as well as tips to ensure you are well prepared for the business lending world. Here is a quick look at what most lenders look for and want to see.
Five Keys of Loan Applications
The most fundamental characteristics most prospective lenders will concentrate on include:
- Credit history
- Time In Business
- Cash flow history and projections for the business
- Collateral available to secure the loan
- Character
Credit History
Lenders will want to review both the credit history of your business (if the business is not a startup) and, because a personal guarantee is often required for a small business loan, your personal credit history.We recommend obtaining a credit report on yourself and your business before you apply for credit. If you discover any inaccuracies or problems, you can correct them before any damage to your loan application has occurred. If you can, find out which credit reporting company your prospective lender uses and request a report from that company.If your credit has some discrepancies or derogatory marks on it then be prepared with an explanation to these items.
Credit Scores Rating Description
<600 Poor Well below the average score of U.S. consumers and demonstrates to lenders that the borrower may be a risk
600-640 OK This credit score is below the average score of U.S. consumers and many lenders may find this loan to be to risky and may decline
640-679 Fair This credit score is close to the average score of U.S. consumers, though many lenders may approve loans with this score.
680-720 Good This credit score is near or slightly above the average of U.S. consumers and most lenders consider this a good score.
740+ Very Good This credit score is above the average of U.S. consumers and demonstrates to lenders that the borrower is very dependable.
Time In Business
The time in business lets the lender know just how much experience you have in running a business. This is important in placing a risk factor on to an application. Start Up or New businesses are deemed “high risk” because of the rate at which businesses fail. The time in business Tiers are as follows:
- Start Up to 2 years: Higher Risk
- 2-4 years: Medium risk
- 5+: Low risk/Established business
Time in business is something most lenders put a lot of importance on this along with credit score.
Cash Flow
A lender’s primary concern is whether your daily operations will generate enough cash to repay the loan. Cash flow shows how your major cash expenditures relate to your major cash sources. This information may give a lender insight into your business’s market demand, management competence, business cycles, and any significant changes in the business over time.
Lenders will usually look at 3-6 months of bank statements verify monthly deposits and ending balances to see what’s left at the end of each month. For larger dollar amount loans, 150K+ your usually going to need to provide tax returns to show business cash flow.
Collateral to Secure a Loan
When it comes to obtaining a secured loan, providing collateral is a must. To a bank, collateral is simply defined as object that secures a loan or other debt, so that the lender may seize that object if you fail to make proper payments on the loan.
When lenders demand collateral for a secured loan, they are seeking to minimize the risks of extending credit. In order to ensure that the particular collateral provides appropriate security, the lender will want to match the type of collateral with the loan being made.
Things lenders look at when evaluating collateral: Age, manufacturer, cost, equipment’s use. These are what tell the lender what the asset they are keeping on their books to secure this loan.
Character as a Potential Business Borrower
The weight given to a lender’s assessment of a borrower’s character can vary tremendously between lending institutions and between individual lending officers. You want to be able to present a clear and clean package to submit your transaction for approval. The more stories or selling you need to do to the lender the less clean the deal looks on the surface.
We all understand that mistakes happen and not a lot of lenders want to listen to a story. They only want clean and easy deals.
Axe Business Funding listens to all our customers stories to try and make the deal make sense and get the applicant approved.
“Other” Items
These are items that will usually be requested for larger loans, 150,000+ and can be personal and business tax returns, additional bank statements, personal financial statements ect. If your looking for an equipment loan of this size then you want to have 2 years of business and personal tax returns, 6 months of bank statements ready to submit once requested by the lender.
The reason Axe has had so much success and repeat customers is because we listen to our customers story. We have built programs for all credit types and always strive to get our customers the most aggressive pricing.
Call for more info or to see how Axe Business Funsing Can help your business GROW