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Applying for a business loan can be a daunting endeavor, however it is often a first step towards obtaining the necessary funds to support business growth. Below is a list of factors which are likely to be considered by your bank’s credit department when determining the risk profile of your business and ultimately whether to approve a loan request:
Financial Performance– the ability of the business to generate cash flow from operations to service both interest and principal repayments is a key consideration. If the business can demonstrate that its cash flow has been consistent or is growing, it will be well positioned to service new bank debt. Additionally, future projections which consider expected fluctuations of revenues, expenses and other variables are often requested.
Ratios– in addition to the above financial considerations there are various ratios which provide a litmus test indicating the health of the business. Commonly evaluated ratios include debt to equity (debt divided by equity), current ratio (current assets divided by current liabilities) and debt service coverage ratio (cash available for debt payments divided by interest/principal/lease payments). Ratios can highlight key issues such as whether a business has too much leverage or liquidity problems.
Management– the quality and experience of management is a key measure of the future success of a business, including its ability to service future debt. Both a proven track record and a sound business plan for the future are evidence that management has the capabilities, skills and foresight to adeptly manage operations.
Credit History– credit history is of paramount importance since it indicates whether the business has historically paid its bills and serviced its debts in a timely manner, as well as disclosing pertinent information such as security filings. Furthermore, when evaluating an owner/operated business the personal credit history of stakeholders may be evaluated since financial resources are often closely tied to the owners.
Security– the assets of the business offered as collateral are often a key component supporting a loan application. In the case of a mortgage, the loan is supported by the real estate being acquired, whereas a line of credit is typically supported by current assets (such as accounts receivable and inventory). Security/guarantees can also be requested from business owners and related parties if the available collateral is insufficient.
Other– there are a myriad of other considerations such as sector risks, litigation facing the business, import/export concerns, customer concentration and other factors evaluated on a case-by-case basis.
Approval of the business loan is often provided with several contingencies such as ongoing financial covenants (typically minimum ratio thresholds) and non-financial requirements (such as adequate insurance) to maintain in accordance with the terms of the loan agreement. Additionally, loans above a certain threshold may require accountant-prepared financial statements subject to a review or audit in order to provide the bank with a level of comfort regarding the annual figures.
Our professionals are well equipped to offer valuable guidance as you navigate your business through the loan application process and other future challenges.