Knowing what an SBA lender is looking for will help your loan application.

Liquidity is the air allowing your small business to breathe. Without capital, you can’t get started, you can’t expand and you can’t weather tough times. But to access capital, you must “think like a banker.” If you are contemplating a business loan, here are some tips about what lenders require.

The Big Questions

Lending institutions are all different, but they typically all ask for the same information. You should be prepared to answer the following questions and have this information handy when filling out a loan application:

• Why are you applying for the loan?
• How will the loan proceeds be used?
• What assets need to be purchased and who are your suppliers?
• What other business debt do you have, and who are your creditors?
• Who are the members of your managment team?

What does a lender want to see?

Business loan applicants must have a reasonable amount of their own money to invest—or already invested—in their business. This ensures that, when combined with borrowed funds, the business can operate on a sound basis. A lender will examine your business’s debt-to-worth ratio to help all parties understand how much money the lender is being asked to lend (debt) in relation to how much you have invested (worth).

A company must also be able to meet all of its debt payments as they come due—not just the new loan payments.

Lenders will want to know about any possible sources of repayment to understand how you would pay your debt if the business fails. A critical factor in getting a loan approval is making sure your lender understands how the needed revenue will be generated. If you can show your lender a clear business plan that provides for all debt payments to be paid on time, your application has a better chance of being approved. If you have savings or assets held back to cover the possibility of future income shortfalls, this also will help your case.

Terms to Know

Positive working capital is essential for your company to meet its continuous operating needs, and will be scrutinized by your lender. The availability of working capital influences your company’s ability to meet its trade and short-term debt obligations, as well as to remain financially viable.

Collateral is an additional form of security which can be used to assure a lender that you have a second source of loan repayment.

Assets such as equipment, buildings, accounts receivable and, in some cases, inventory are considered possible sources of repayment if they can be sold by the bank for cash. You can assume that all assets financed with your borrowed funds will be used as collateral for the loan.

Resource management is how you handle the day-to-day affairs of your business, including how you pay your debts, collect the debts owed to you, deliver your service or product to customers and manage your inventory. Your proven ability to manage these business resources is a prime consideration when a lender is determining whether or not you are creditworthy.

Character is the personal impression you make on the potential lender, and the records of how you have behaved in the past. A lender decides subjectively whether or not you are sufficiently trustworthy to repay your loan or generate a return on funds invested in your company.

Managerial capacity is your educational background and business experience, as well as past achievements in your industry. The quality of your references and the background and experience of your employees also are considered.

Reviewing Ratios

Mathematical calculations on historical and projected financial statements can be used to form ratios that provide insight into how your resources have been managed in the past. It is important to understand that no single ratio provides total insight. The use of several ratios in conjunction with one another gives an overall picture of management performance.

Some key ratios all lenders review are:

• Debt to worth (including equity investment)
• Working capital (how much capital you have to run your day-to-day business)
• The rate at which income is received after it is earned (how quickly you collect debt owed to you by others)
• The rate at which debt is paid after becoming due (how quickly you pay your obligations)
• The rate your service or product moves from your business to the customer

The SBA’s business loan programs are always a viable option of funding that bankers might use to offset their risk. The SBA does not lend money directly, but rather guarantees a portion of the loan to the bank should you default. The actual money for your business loan, even if the SBA guarantees the loan, does not come from the federal agency; it comes from your bank. The final loan decision is ultimately made by the bank or other approved lender.

Get to know your banker and how your lending institution operates. It could pay off in the long run as you look to start, expand or weather the storms of owning a business.