Factors lenders consider when lending to small businesses
Small businesses are often in need of financing to support their operations and to expand their business. Banks and other lenders are often heist to loan money to small businesses who don’t have significant amounts of collateral or an extensive earnings history. Convincing a lender to buy into a small businesses’ story for expansion and growth can be challenging. Understanding the factors that a lender will typically examine will help you to understand how you will be judged and what factors matter to lenders when deciding whether or not to extend an equipment loan.
Many of the factors will depend on the type of industry that the small business is operating in. Lenders assess businesses very different on their operations and different industries have different metrics and different l options available to them. Businesses that deal with significant amounts of inventory or receivables will typically be offered asset based loans that are issued with limits that are calculated based upon the amount of assets held by the business. These asset based loans calculated as a percentage of the assets held but the exact percentage is very dependent on the type of inventory held. Companies that have inventory based on technology that can be quickly outdated are typically provided with a smaller loan. More stable industries are afforded larger loans.
Other businesses are given loans based upon multiples of earning or revenue. A lender typically looks into the past earnings history and projected returns and calculate the amount that should be lent to the company based upon that. For example a business that sells advertising space on a website will typically not have any other assets to support the repayment of the loan. Instead, a lender will look at the earnings history for the business, any large contracts that the borrower has, and any concentration of their business in the hands of a small number of customers.
Beyond the industry that your company is in, the use of these funds will significantly impact the success of a loan you are taking out. If you are looking to purchase property from which you will run your business, assessment on the property will be performed, its resale value, and any costs you need to incur to get it ready for your use. If you intend to use your small business loan to expand, investigation of your expansion plans are considered by the lender. Having a formalized plan of expansion which has a well thought out identification of the opportunities and risks that you see will go a long way towards helping to secure the loan for your business.
Of course, these are only a few of the considerations that a lender has when making a loan to your business. Try assessing your business from the view of an outsider looking to lend and help to identify the risks that your business has but also the strengths and opportunities that you have to help to put your potential lender at ease and to help you to obtain the loan that you want for your small business.