Much of the process of applying for a business loan is looking at your investment, business practices and debts to help lenders determine the risk of you not paying in the future. Sound familiar?
The process derives from a similar foundation of a personal loan. Lenders just want to ensure you'll be able to pay them back, and they have a strategy to determine this risk.Just like your personal credit, lenders look at your "business credit" including debts, earnings, timing of your repayments on your current debts and the probability of successfully repaying them. Even though you're applying for a business loan because you need assistance, lenders still require you to be investing a reasonable amount as well. This is called Equity Investment and includes your debt-to-worth ratio, which is calculated by comparing how much you need from a lender — debt — in relation to how much you're investing — worth.
Like credit, if you have minimal or nonexistant equity, equity tells the lender if there is a risk you won't pay. Also, if you already have high debt and low equity, it's not likely that you'll be approved for a business loan.
Another thing lenders look at is your working capital. This is simply the difference between your current assets and current liabilities (any payments due within one year). What's left over is your working capital and is seen as available (or unavailable) funds to pay short-term debts such as the loan you're currently applying for. Collateral, or assets that can be considered for repayment if you cannot pay, is also reviewed. Assets including business equipment, buildings and even personal or home can act as collateral.
Finally, lenders look at your day-to-day activity, including how you pay debts, deliver your service or product to customers, and manage your inventory.Overall, your payment history and current financial situation will determine risk for lenders.
Get your credit life together. Get prepared so you can move toward your business goals.