If your small business is in need of additional funds for expansion, improvements, major equipment purchases, or any other reason, you may be thinking of approaching a bank for a business loan. Before you apply you should understand the business loan approval requirements that most banks are looking for. From the bank’s perspective, it is all about assessing the possible risk level of the specific loan being requested. Being aware of what banks are looking for can help you be prepared and put your business in the best position to get approved. Here are some of the most important factors banks consider:
Banks will examine the credit history of the business owner and the business itself to determine whether they have a good track record of paying back loans and managing debt. The credit score of the business is one of the most important factors that banks consider. Generally, a credit score of 650 or higher is considered good and can increase your chances of getting approved. However, the Small Business Administration (SBA) recommends that small businesses have a credit score of 680 to be considered for a loan. Your debt-to-income ratio as well as the length of your credit history also contribute to the assessment of the creditworthiness of your business.
Positive Cash Flow
A positive cash flow is critical for any business, and banks want to see that you have a consistent cash flow to ensure that you can repay the loan. Banks will review the business’s financial statements, including income statements, balance sheets, and cash flow statements, to determine the company’s profitability and cash flow. Ensuring that these key documents are accurate and up to date is very important before approaching a bank for a small business loan. Working with a qualified CPA firm to help get your books in order is recommended for anyone seeking a business loan.
Banks will want to know what assets the business has that can be used as collateral for the loan. This helps to mitigate the risk for the bank in case the loan cannot be repaid. The types of collateral that banks will accept varies and can include real estate, equipment and inventory. If the bank determines that the business does not possess enough collateral to secure the loan, they may require a personal guarantee from the business owner or other stakeholders to ensure that the loan is repaid.
Banks will often want to see a well-crafted business plan that outlines the company’s mission, goals, and strategies for growth. This helps the bank understand the viability of the business and its potential for success. These plans should include things like financial projections, marketing strategies, and a plan for how the funds will be used.
Industry and Market Experience
Banks will consider the industry and market that the business operates in, as well as any potential risks or challenges that could impact the company’s success. Demonstrating your background and expertise by supplying a resume that highlights your track record and success can help demonstrate to the bank that your business has a high likelihood of success too.
Banks will want to know how the loan funds will be used, as this can impact the overall risk of the loan. For example, a loan to purchase inventory may be less risky than a loan to fund an expansion.
Working with Haworth & Company
By examining these factors, banks can assess the overall risk of the loan and make an informed decision on whether to approve it. It’s important for business owners to know the business loan approval requirements that banks are looking for and be prepared to provide the necessary documentation and information to support their loan application and demonstrate their creditworthiness and ability to repay the loan. Haworth & Company is an excellent accounting partner for businesses that are focused on growth. Our team can help make sure that you have the information and insight you need to demonstrate to the bank that their money will be invested well and repaid in full. Contact us today to get started.