In our prior blog post, we discussed common reasons for business failure, which included a lack of capital. Having access to funds to begin or improve your business is critical. Understanding what a lender looks for when underwriting a business loan, can help you include the right details for a strong application. We found an excellent explanation in the Boston Business Journal, and we’re sharing the highlights here! We’re also including some information of our own to help you.
First, it pays to know what banks are offering Small Business Administration (SBA) financing. Not all financial institutions offer SBA loans, and your odds might be better at a bank that has a proven track recording of SBA lending. The SBA publishes a list of top lenders for your reference.
Of course, you should not overlook the bank where you already do your business. Ask for their commercial lending department. Sit down with a loan officer to discuss your capital needs and their requirements. Seeking a loan from the institution you already have a relationship with, could make for a smoother process, as they already know something about you.
Whether you find financing opportunities close to home, or you seek a loan from a new bank, the underwriting process will look for these six things:
Character. This involves how you’ve treated your other debts and obligations. Are you likely to honor the terms of repayment?
Capacity. This question looks at your ability to pay. Namely, cash flow and income. We discussed cash flow vs. profit in our prior blog post.
Capital. Does your loan amount make sense? Lenders will look at sales, profitability, cash flow, retained earnings and assets.
Collateral. The bank may require security for the debt, such as a lien against real estate, equipment, or other assets.
Coverage. What kind of risk do you present? The lender will look at ways to mitigate that risk.
Conditions. Improve your chances by explaining how you’ll use the money, and how it will benefit your bottom line. Don’t be afraid to point out your standing in the community, the jobs you supply, and other factors that show your overall business value and civic contributions. Keep in mind, however, that the numbers still need to make sense to the lender’s point of view.
One more tip – when you find a business lender who is willing to work with you, treat them like gold. If you do have any setbacks, don’t hide from your lender; pick up the phone and call them. Working out a solution to a temporary crunch is easier if you’re not already behind in payments.
Establishing and maintaining a good relationship with a business lender, can help you meet capital needs as your business grows.
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