Written by: Mathew Hein, Director of Business Banking, Firstrust Bank
At Firstrust Bank, we know when the time comes to get a business loan, potential borrowers are going to ask one important question: What are lenders looking for when they evaluate my loan application?
There are several factors lenders will look at, but whether you’re a first-time borrower or a mature operation, the fundamentals of a credit decision are the same.
Mind Your Leverage
How does your debt-to-equity ratio stack up against others in your industry? Lenders will look at this as a way to measure the fitness of your company; therefore, a lower ratio is preferred. And don’t forget, your balance sheet is going to change when you borrow.
Make Sure You Have Liquid Assets
Do you have cash reserves? How long would it take for your assets to be liquidated in a time of need? Lenders like to know that borrowers have cash on hand or assets that can be quickly converted to cash should the need arise.
Build a Cash Cushion
Does your business have enough cash flow to cover debts and still have cash available? Most lenders want to see a cushion that shows a cash-to-debt ratio of least 1:25. Officially known as your “debt-service coverage ratio,” this can be calculated by dividing your total annual net operating income by your total annual debt costs (including principal, interest, fees, etc.).
Offer Solid Collateral
What is the secondary source of repayment for the lender? Your borrowing power improves when you have healthy collateral to offer. Ideally, you also want to use assets that match your use of funds.
Share Your History
Lenders will check your credit score and review the strength of your personal financial statement. Keep in mind, lenders like predictability. The more history you can share, the more likely the lender can get comfortable with your company, offer a structure that’s comfortable for you, and feel good about your ability to repay the debt.
Choose the Right Lender
Crunching numbers can tell a lender much about your business and its overall health. But it doesn’t always tell the whole story. A great lender will use high-tech analytics and data tools, but also take the time to learn about you and your business goals.
At Firstrust, you’ll be working with a lender that takes the time to get to know your business inside and out. We use modern technology for speed and old-school relationship-building to build your trust and form a lasting, prosperous partnership.
Firstrust Bank was founded in 1934 and we are currently in our third generation of family ownership. We are proud to be a preferred lender of the Small Business Administration (SBA). To learn more, please visit us at firstrust.com or call 800-220-BANK.