3 things lenders are looking for
Applying for credit or a loan? Make your application shine by highlighting the three things lenders care about most.
Borrowing can help you make big moves, especially when you borrow larger amounts with a business line of credit or a loan. But applying can make you feel vulnerable. You’re putting your cards on the table, and the stakes are high.
Knowing what lenders are looking for can help tame the uncertainty. Although each lender has its own unique requirements, most evaluate these three factors: leadership, financial health and collateral.
Imagine getting on a plane. Your pilot steps out of the cockpit and says, “Today, I’m flying a plane for the very first time. I’ve almost earned my pilot’s license, and I think I know where we’re going. My co-pilot has called in sick today, so it’ll just be me up there. Away we go!”
Not very encouraging, right? You want to fly with a pilot who has experience, knows the route and has a trusted support team.
When a lender considers whether to loan you money, you’re the pilot and they’re choosing to travel with you on your business journey. That’s why it’s essential to establish trust and show lenders that you’re a reliable partner.
To evaluate your ability to lead a business, lenders will consider your:
- Experience — Be able to demonstrate your achievements, relevant experience and responsibilities. Consider adding a resume to your application, and include hard data to back up your accomplishments.
- Business plan, including mission and vision — Show lenders that you know where you’re headed and how you’ll get there. Adding a financial projection can demonstrate that your business is on the right track.
- Personal and business credit history — Lenders like to see that you have a solid record of making on-time payments and balancing different types of debt. Before applying to borrow, check your credit score and take steps to improve it if needed.
- Outside resources — Show lenders that you’re aware of your weaknesses and can call upon any necessary outside expertise and support.
When you let someone borrow something, you’re trusting that they’ll return it. The same goes for financial institutions that lend money. They want to know that your business will be able to pay them back — on time and with interest.
Financial documents play an important part in showing lenders that you’re trustworthy. These documents help lenders evaluate risk and paint a picture of your financial standing, business history and potential for growth.
When you apply for a business loan, be prepared to share these key documents to meet the minimum requirements of most lenders:
- Profit and loss statement (P&L) — Also known as an income statement, this document shows how much profit your business made in a given reporting period, often a fiscal quarter or a year. It measures four factors: revenue, gains, expenses and losses. The P&L shows changes over time so that lenders can see how your business is evolving.
- Cash flow statement — This document summarizes how money moved into and out of your business during a given reporting period. It organizes your income and expenses into three categories: operating, investing and financing. Lenders use it to determine whether your business has enough cash coming in every month to pay for loan payments and operating expenses.
- Balance sheet — The balance sheet offers a snapshot of your business’s value. Unlike your P&L and cash flow statement, the balance sheet measures a single moment in time, so it will vary from day to day. It provides a quick glance at debts, equity and how much your business is worth.
Lenders often require collateral to secure loans and minimize their risk. The larger the cash value of your collateral, or the easier it can be converted to cash, the more likely you are to get a line of credit or a loan — and at a better interest rate. Collateral can include physical items like cars, property or equipment and intangibles like accounts receivable, stocks and Treasury bonds.
Use the MAST framework to conceptualize the value of your collateral:
- Marketable — Is there a strong secondary market for the asset? For example, real estate will have a stronger secondary market than a rare antique, which requires a niche buyer.
- Ascertainable — How easy is it to assign a market value to the asset? Evaluation, often by an appraiser, is easier for tangible items like furnishings and equipment than for intangibles like a patent idea or an unpublished novel.
- Stable — Is the asset’s value likely to fluctuate? Stocks and bonds have a simple cash value that can change daily depending on the market. Stable assets include real estate, gold or cash, which are less likely to change in value.
- Transferrable — How easy is it to transfer the asset from one person to another? For example, you can transfer real estate or intangible assets with the stroke of a pen, but it’s harder to transfer ownership of physical assets that are difficult to transport or are in remote locations.
It comes down to trust
Lenders want borrowers who are likely to pay them back. Your job is to show them you are that type of borrower.
Building a relationship with a lender can take time. A great first step? Show them that your business is supported by strong leadership, solid financial health and collateral that meets MAST criteria. By maintaining your relationship with a lender throughout your borrowing journey, you’re creating the foundation of trust that will help you borrow successfully.