What are your chances?
There are several key areas that lenders use to evaluate potential borrowers.
- Credit. For established businesses, the lender will focus on the company's credit and outstanding accounts. For businesses less than three years old, your personal credit will also be evaluated.
- Cash flow. This includes audited results and detailed future projections. Many lenders require a cash flow that is 1.25 times the total cost of the company's total and expected debt.
- Collateral. Real estate, valuable equipment, or other property can be used as collateral that the lender can seize if you default on the loan. In some cases, contracts for future work can be used to guarantee loans.
- Management. Your management team's ownership experience, tenure with the company, and familiarity with the industry will all affect your chances.
- Capital and equity. This is the total value of your cash on hand, equipment, facilities, and other tangible assets. "Debt-to-equity ratio" is often used as a rule of thumb - lenders will look for situations where your total debt is no more than 3 or 4 times the equity.
None of these have hard-and-fast rules, however. Other factors such as proven profitability and the quality of your business plan will contribute to the lender's decision. There are several steps you can take to improve your chances of getting the loan you need:
Establish trust. The first thing you'll want to do is try to establish a relationship with the lender sitting across from you. The more they know you as a person, the more they'll trust you. And when it comes to asking for money, nothing is more important than trust.
Refine the business plan. Make sure your business plan is optimistic, but don't sugarcoat potential problems or risk. Be thorough about your plans for the future, address contingencies, and talk about the qualifications of your management team. The business plan is one of the primary documents that lenders use to gauge the stability and future of your business.
Payback. Of course the main thing weighing on the mind of the potential lender is how you are going to pay them back. One step beyond that is how you are going to pay them back if your numbers fall short of your projections. Addressing both of these issues thoroughly can help put their mind at ease.
Choose the right size loan. Avoid asking for more or less money than you need. You shouldn't write your business plan to justify the amount you want - instead, use your business plan to determine how much you need.
Find the right lender. Some lenders focus on small business loans - these are your best chance for success if you fit the mold. If they're familiar with your industry, all the better. The next section talks more about evaluating lenders.