Fund It

How Bankers Look at Borrowers: 5 Key Points

Borrowing money is a common way to fund a small business, but actually getting a loan may not be easy. Before making a loan request, consider how bankers evaluate loan eligibility and adjust your game plan accordingly:

1) Capacity to repay. A banker wants to know up front that you have the ability to pay your loan back, so come to your first meeting armed with proof: an analysis of anticipated cash flow and a description of collateral that could be used as a secondary repayment source.

2) Good credit history. Request a free copy of your credit report at www.annualcreditreport.com, then look it over carefully for mistakes and potential “red flags” before heading to the bank. A missed payment or a period of bad credit due to a medical crisis or other life-altering event won’t necessarily disqualify you from obtaining a loan; attaching a written explanation of the situation to your credit report could help your case.

3) Equity in your business. Equity can be built up through retained earnings or the injection of cash from owners/investors. Banks typically want to see that the total liabilities of a business are no more than four times the amount of equity. Don’t make the mistake of thinking you can obtain a loan to cover 100% of your financing needs; you will have to put some of your own money into this venture.

4) Collateral. Defined as personal and business assets that can be sold to pay back the loan if necessary. If you are just starting out and have no collateral, you will probably need a co-signer who has collateral to pledge.

5) Experience. Bankers do not look fondly on loan applicants who want to open businesses for which they have no experience, unless they can demonstrate that they intend to hire people who know the business or take on a partner with appropriate experience. If you do not have personal experience, get some. Before you apply for funding, work in the business first and take a few entrepreneurial training classes.

Tags: Florida Small Business, Growing Your Business