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Small Business Loans: What Lenders Look For
To many on the outside, the process by which banks make the decision to approve or deny a loan seems obscure and difficult to understand. There are the obvious factors: income and credit rating, which have been discussed in other articles. But there are several other, less tangible criteria by which banks judge loan applicants. Let's look at this the way a banker would.
What's a banker trying to do? When he gives out a loan, he wants to see that money paid back with interest. He's not expecting to make 50x his money back-he might end up with 1.5x or 2x, depending on the terms of the loan. The bank is looking for a low-risk business that will be able to make its payments. Compare this to an angel investor, who is gambling that your company might take off and change the world. Banks try to hit singles, not home runs. They're running the football up the middle, not throwing for the endzone. The name of the game is low risk, safe return.
So, when you're looking for a loan, you need to convince the bank that you're the guy who's going to get them their money back. You're going to do that by running a successful business. Prove that to them by knowing the business inside and out. You should know this anyway, since you're starting a business. But when you make your case before the bankers, you need to bring your "A-game." If you know what you're talking about, the bank is going to trust you.
The third less-known factor that lenders look for is a favorable debt to net worth ratio. The bank will compare your net worth to your existing debts, and to the debt you are seeking to acquire. If the numbers are too unfavorable-the interest payments will be too much, the principal too high-the bank is more likely to decline your request.
Raise Capital from Banks and SBA Lenders
Growthink’s Step-By-Step Guide to Raising Capital from Banks and SBA Lenders
will guide you through the process of finding and securing debt financing for your business.
Click Here To Download Growthink's Loan Guide Today!
Here is a sample of what you will learn in the report: