I don’t want to over simply things as business financing applications can become fairly complex and involved, depending on the amount of funding a business owner is looking for and its application.
That being said, regardless of the level of complexity attached to not only getting an approval in place, but getting funds advanced, virtually all lenders are going to focus on these three main areas:
Each category of lender is going to put different weights on each of these areas as well, but as one institutional lender who provides low cost financing put it to me the other day, “in the first 10 questions we ask, 9 are about debt service”.
So it goes without saying that if you’re in search of low cost financing, the proof and support for debt service are going to be the most important element being reviewed.
As the cost of financing goes up due to perceived higher risk, which is usually associated with less predictable or supportable debt service, the shift in attention moves to the other two areas as there is a greater possibility of a loan default which would require the lender to realize on securities and guarantees.
This is not to say that debt service is not going to be very important to the asset based lenders of the word. It just means that at least half of their top ten questions are going to be directed to security and guarantees pledged.
And when I speak of guarantees, this does not automatically include personal guarantees. If a business has accumulated enough retained earnings over time and non pledge asset value to provide the comfort the lender is looking for, then a business guarantee may be all that’s required. In situations where there are multiple business entities within a business group for tax purposes, its not unusual to see corporate guarantees from each entity to support a loan issued to one business in the group of companies.
These three areas are basically the 80/20 of business financing for most lenders. If the 500 page business plan or elaborate financial projections don’t adequately cover off these three areas in accordance to the lender category and risk category they are trying to get funding from, then the loan application is likely going to be a non starter.