Sooner or later, your business is going to need funding from a bank. When approaching one, it is helpful to know the factors a bank is going to take into consideration when evaluating your application. With this in mind, let’s take a look at the key issues.
The five factors what will affect the qualification of a small business loan
1. Credit history – The bank will be interested in the credit history of your business. This is not the same as your personal history. A business credit score will be associated with the tax id number of your business while your personal credit score will be associated with your social security number. As a precaution, make sure that you have looked at the most recent credit report history on your business to see if all is well. Sometimes, there might be a possibility of a mistake which you can try to get rectified before you apply for the loan.
2. Vested Interest – The bank will be interested to know how much money you have put into your business. If you have not put it any of your own money in the business, do not expect the bank to put in their money either. It is called vested interest because the bank assumes that you will work hard for your business if you have already invested money in it. If you aren’t risking much, why should the bank?
3. Working Capital – Working capital is nothing but the liquidity of your business. Your current assets will need to be more than your current liabilities. In other words, you will need cash to keep your business running. Lack of working capital will mean that your business can easily come to a grinding halt, which is not something that will result in the loan being paid back.
4. Repayment capacity – This is fairly obvious and it only natural to expect the bank to analyze your repayment capacity. They will want to look at the financial statements of your business to make sure that you have a good cash flow that will allow for easy repayments of the loan. Banks will also seek collaterals on the loan that will reduce their investment risk.
5. Your expertise with the business – Unless you are starting up a franchise operation, the bank will be very interested to know about your track record in running a business. If you don’t have a track record, the bank will expect you to show qualified personnel on your management team who have a track record in running this particular type of business. That person could be a partner or an executive who has good experience. It would be very difficult to get a loan if you do not have any prior experience in running a business.
Are these factors the only thing the bank will look at in relation to your business? Of course, not. That being said, you are well on your way to funding if you can position yourself strongly on them.
