Securing financing for your business can be challenging. Whether you’re borrowing money for the first time to start your business or you’re looking for a loan to grow, the lending criteria banks use can be rigorous. It’s important to know what are the must haves that a bank is looking for to approve your loan. Here are the top 4:
- Financial statements that are timely and accurate. Some clients have one or the other, but you need both. Financial statements are the language that bankers speak to obtain credit. If you can’t provide them within 30 days of month end or you can’t produce them accurately then take a hard look at your people or process that is required to get you there.
- Cash flow sufficient to repay the loan with a cushion, usually 25-30% cushion. If you’ve heard bankers talk about debt coverage of 1.25 or 1.3-1, this is what they’re talking about. Make sure you understand how they calculate it. Does it include or exclude owner distributions or taxes. On a line of credit, is it interest only or does the bank term out a principal portion of the line in their calculation? Since this is a ratio, make sure you understand both the numerator-cash flow and the denominator-loan payments.
- Collateral sufficent to cover the loan amount that is margined. What is an appropriate margin? For most real estate, equipment and accounts receivable, the margin is 20-25% meaning the lender can loan up to 75-80% of the value. However, if you want to borrow $500,000 and your only have $300,000 of margined collateral, then the lender will be looking for you to secure the difference.
- Good credit is a personal credit score above approximately 680. Since your credit score is based on a variety of factors, good credit excludes bankruptcy, liens, judgments, garnishments, and foreclosures.
When you go to the bank, these items will be what they’re looking for to approve your loan. You can also read about deal breakers for financing.