Procuring the capital necessary to start or build a business can be a real challenge for business owners. This is especially true, post-credit crisis.
While lenders are beginning to relax their lending criteria, getting business financing is still much more difficult than it was in the heady days when the credit bubble was still intact.
That is not to say that acquiring business credit is impossible; in fact, quite the opposite is true. Lenders are eager to profit from loaning money to businesses, so long as their criteria is met.
So, what do business lenders want to see in potential borrowers?
Obviously, one of the key criteria lenders want to see in a borrower is the ability to repay the loan, according to the terms set forth in the lending agreement. For new business owners, this means proving the business will be profitable. How can they do that if the business has no history?
Well, they will need to have a solid business plan in place, for starters. They should also have realistic cash flow projections covering the first three years of business, which can be based on other similar businesses. Confidence is another important asset for new business owners. Loan officers are unlikely to want to take a chance on a business that the owners themselves seem unsure about.
From existing businesses, lenders want to see proof that the business is on solid financial ground. Data that can be used to illustrate a business’s fiscal health includes annual sales figures, documentation of assets and liabilities, bank account balances, and value estimates for any assets that will be made available as collateral.
Credit Ratings Are Key
A business loan applicant’s credit ratings are obviously an integral factor for lenders assessing borrower credibility. Businesses with good credit are more prone to paying off loans according to terms, and lending to them is less risky.
Business owners’ personal credit ratings are also quite likely to come into play when applying for a business loan, even if the business has fairly good credit. Banks are eager to avail themselves of any additional security they can, and requiring personal guarantees from loan applicants is a common way of obtaining this security. However, the personal guarantee of a business owner of questionable creditworthiness is not very reassuring.
So business owners who intend to seek out business loans in the near future should work on building their business credit ratings, and their personal credit, as well.