3 Key Factors Lenders Look For When Assessing Business Loans

Getting a business loan may be what separates your fledgling commercial idea that only exist in your head from a full-blown business empire that exist in the material world. Despite the importance of securing such a loan, however, most entrepreneurs struggle when trying to prove to lenders that hey have what it takes to make it in a cut-throat marketplace. Rather than sitting on your hands and hoping for the best, you should be taking actionable steps that will ensure your lasting success.

Here are 3 key factors lenders look for when assessing business loans, and how you can go about improving your prospects when applying for one.

1. You must have an admirable cash flow

An admirable cash flow is the life blood of any successful company, which is why it’s so important you should be taking steps right now to ensure that your cash flow is in good shape when you eventually apply for a loan. Why is having a good cash flow important? Largely because vendors want more than your promises and reassurances when they’re considering giving you their money – more than anything else, they want guaranteed results, and proving to them that money is flowing into your business on a regular basis can help assuage their concerns that they’ll never see such results if they lend to you.

What you’re essentially trying to do is prove to the lender that so much money is coming into your business that you’re all but assured to eventually hit profitability, if you haven’t done so already. This means bolstering your cash flow to the greatest extent possible. By boosting short-term sales figures via discounts which lure in new customers, for instance, you can convince business lenders that your business is enjoying a surge in growth and is thus an ideal candidate for a loan.

Other techniques to bolster your cash flow should also be considered. Taking you current profits and depositing them in an interest-earning account, for instance, will prove to potential lenders that you’re a forward-thinking business owner with an eye on the future. Similarly, you’ll want to diminish your cash outflows by any means necessary; vaguely speaking, this means ‘cutting the costs of doing business,’ but more specifically it may entail getting rid of unessential employees or changing suppliers in order to secure better long-term financing on your deals.

Outside of obtaining a business loan, there are also good reasons to focus heavily on your cash flow, namely because it’s one of the defining factors of whether a small business succeeds. According to a data-driven analysis released by CBInsights, for instance, running out of cash is the second most common reason that small businesses crash and burn. Still, having an enviable cash flow isn’t enough in and of itself. There are other factors lenders will be assessing all the while, including…

2. What your credit history looks like

Lenders will also want to assess the credit history of both your business and the individual business owner applying for the loan. This is why it’s imperative to focus on paying down any debts you have as soon as possible; as a matter of fact, tamping down on any excessive debts you have is perhaps the only reason you should sometimes ignore your cash flow by focusing on something else. This is because excessive levels of debt won’t only lead to fiscal failure in the future when your chickens come home to roost, but also because lenders won’t want to touch you with a 10-foot pole if they discover your business already owes money to others.

If you review the common factors that lead to business loans being denied, for instance, you’ll discover that having a shoddy credit history is regularly listed as one of the chief reasons that entrepreneurs can’t get their hands on the fund they so desperately need. If you have capital equipment that your business can’t afford to lose, consider repairing it instead of replacing it when it breaks down. Elsewhere, you may find it necessary to reject unnecessary but attractive technological innovations which will only further burden you financially.

Don’t think that the credit history of your business is the only thing that will come under scrutiny, either. If the lenders you’re seeking a loan from are good at what they do, they’ll also be assessing your personal credit history, even if they say otherwise. Building business credit with poor personal credit isn’t going to be easy, but it’s very achievable if you know how to approach it from the get-go. It may be a tough thing to swallow, but many business owners who are seeking out a business loan have to make cutbacks in their personal lives in order to prove their austerity and ability to carefully manage financial matters.

3. Stability is the key towards getting a loan

The final key factor that lenders assess when reviewing your business loan application is the overall stability of your company coupled with the stability of your individual life situation. This is directly related to but nevertheless fundamentally different from both your cash flow and your credit history. It’s incredibly important to understand the importance of stability, so it’s worthwhile to put yourself into the shoes of a lender and see things from their perspective.

If you’re giving your money to another person in the form of a loan, you’re effectively betting on this person’s life; if they succeed, so too, will you reap success. If they fail, however, you’ll fail together. That’s why rational individuals only give loans to their more stable family members and friends; a drug addict is less likely to pay you back than a healthy individual who attends yoga sculpt classes and has a stable job, and similarly a business teetering on the brink of bankruptcy is substantially less likely to pay its loan back than a small business that’s comfortably entrenching itself in its local marketplace without generating PR scandals.

Stability can be hard to define, but there’s a wide variety of things that lenders might assess when mulling the prospect of giving you a loan; the stability of your residential situation, for instance, could determine if you get a loan by proving to lenders that you’re unlikely to skip town and move elsewhere before your brand can turn a profit. Living in the same place for a long time won’t guarantee that you get a loan, but hopping around constantly from one opportunity to the next will generally prove that you’re not as stable an asset as lenders would like you to be.

Finally, it’s worthwhile to know that not securing a business loan isn’t the end of the world. Many companies have been denied loans only to find their much-needed funding elsewhere; crowd-sourcing initiatives are increasingly popular alternatives to loans these days precisely because they provide results to those who know how to leverage them. No matter what you do, however, avoid bad credit loans that will jeopardize your financial future; steep interest rates could crater not just your business but your personal finances as well if you heedlessly accept them. Keep your credit history, your cash flow, and above all else your overall stability in good health, and soon your business will be securing the business  loan it desperately needs.