As a business owner, being bankable is important in order to secure funding. Your bankability refers to your ability to secure a business loan from lenders.
So how do lenders decide whether your business qualifies for a loan? There are a number of things that go into the decision, but it all stems from this simple question: can your business pay this loan back?
Lenders ask for specific documentation including things like a business plan, tax returns, profit and loss statements, and more. Your documents tell a story about your business. In order to strengthen your chances of lending success, you want to make that story a positive one.
The key components that lenders consider are the 5 Cs of credit: character, capacity, capital, collateral, and condition. Let’s go over each element so you can learn what lenders are looking for and some tips on how to improve in each area.
Before approving a loan, lenders want to know that you have everything you need to launch and manage your business. They will ask about your background, credentials, and credit history. You may also need to demonstrate that you have the expertise you need for your business to succeed.
It’s up to you to show the lender how capable you are. Here are some tips for building character:
- Prepare a statement that showcases your business know-how
- Secure any necessary licenses before you apply for a loan
- Review your credit report and dispute any inaccuracies
- Be ready to explain any foreclosures, tax liens, late payments, bankruptcies, or other complications
Keep in mind that you may be able to prove how you overcame financial difficulties, but they may also be reasons to deny a loan if they aren’t resolved. If your credit score is too low, you might want to try to improve it or find a co-signer with a positive credit score before applying for your loan.
Lenders want to make sure that your business has enough cash flow coming in to cover your potential loan payments. So they will go over your tax returns and business plan projections to get an idea of how much money your business can expect to bring in.
This information is used not only to secure a loan, but also to determine the amount of funding you qualify for. Preparation can help you improve capacity, such as:
- Gather all necessary paperwork like business plan projections and tax returns
- Divide your total monthly debt by your gross monthly income to determine your debt-to-income ratio
- Pay down debts before applying for your loan to show your ability to make timely payments and manage debt
Capital refers to the amount of money you have to start your business. This could include savings, income from another job, or funds that others have invested.
Lenders consider the amount of capital you have when they consider a loan application. You will usually need to include some of your own capital in startup costs. Here are some tips to build capital:
- Save up funds before starting your business
- Purchase and pay for necessary equipment ahead of time
- Create and stick to a budget that includes an emergency fund
Lenders often look for collateral in order to secure the repayment of a business loan. This could be business assets, real estate assets, or personal assets.
Without collateral, you would likely need a co-signer to secure a business loan. Here are some ways to improve your collateral before applying:
- Build up business-related assets like real estate for the business or valuable equipment
- Include personal assets as collateral, if possible; the more valuable the asset is, the more it could help you
Even if you have all of your business matters in order, lenders still have another thing they need to consider before approving your loan: market conditions. A number of outside elements could impact your business’s chance of success, like the state of the economy.
Some conditions are related to your competitors, like what their market share is and how you will compete with them. Others could be related to making sure that you are able to reach your target market. You can improve conditions that are within your control, such as:
- Prepare your business plan to include your understanding of market conditions and how you will successfully use current economic conditions
- Showcase what makes your business stand out and how you plan to connect to your target market
- Explain your operational plans to demonstrate how you plan to succeed