As I wrote in my book, Taboo Business Questions, I am not a believer that all businesses need to get loans. However, I have noticed that many business owners have utilized some form of debt to get their business going. That being said, there are ways you can make your business more attractive to lenders and banks. For the bankers I work with, many of these are “common sense”, but, just about every entrepreneur I know doesn’t know what it’s like to be a banker and so I wanted to give some simple pointers to help business owners, entrepreneurs, and people considering starting a business on how to become more attractive to lenders.

It’s important to state that not all lenders look at the same things. Not all banks are the same. Just because one bank turned you down for a loan means that no one will give you a loan. Please contact our team to see how we can help. Strategic Voyages has a network of over 100 different lenders and can likely find you a good fit.

Before I get into the steps to make your business look more attractive, it’s important to note the major points that lenders think about when reviewing a loan application.

Time in Business

Many banks look at time in business first. Time in business is a term that means, “how long has this business been around.” Most of the “big banks” want to see at least 2 years of tax returns, and in some cases 3 years. Having longevity is a great asset and you can become more attractive to lenders by having a longer standing history of running your business.

Some of the lenders our team works with don’t need to see a long standing history. They might take your credit and collateral and be fine with giving a loan. It all depends. That’s why it’s important to know all your options. 

Credit Worthiness

Did you know that your business has credit? Well, it should. If you’ve been in business for a while, many major vendors report late pays to D&B and in some cases a UCC Filing can be filed against your business. 

Your personal credit also has a lot to do with being attractive to lenders. Having a good FICO score gives you better rates and more attractive offers from banks. Many clients ask, “How do I increase my credit?” Here’s 4 easy tips:

1. Make ALL your payments on time. Do not be late. That’s a killer on your credit report.
2. Don’t max out your Credit Cards. Typically, having less than 30% credit utilization is key.
3. Don’t apply to dozens of offers/banks. Applying 5-10 times over the course of a few months makes your credit score drop.
4. Review your credit often. Utilizing a resource like www.AnnualCreditReport.com gives you all the information that banks and lenders see. Review it and make sure you know everything that’s on there. If you don’t need to dispute anything, this website helps you do that too.

Cash Flow (Capacity)

Most lenders want to see that your business is generating a positive cash flow. Look at your taxes, if your profit is negative, there’s only so much some lenders can do. Working with your accountant or business advisor and discussing your lending needs could help you shift some expenses to have a higher profit. 

When I work with clients on lending, explaining their debt service coverage or ability to pay their debt back is usually one of the first points of emphasis. Debt service coverage is a ratio that lenders use to evaluate your ability to repay. Some banks have a very conservative debt service coverage while others don’t care as long as other factors are strong. 

Clean Balance Sheet

First of all, a balance sheet needs to balance. The assets need to be the same as the liabilities plus equity. If your balance sheet doesn’t balance, that’s a tell tale sign that your books are off. Either you aren’t using a software like QuickBooks, or your accountant isn’t paying attention. 

Look at your balance sheet. This is a financial report that shows all your assets (cash, accounts receivable, equipment, inventory, and any vehicles or property), liabilities (people you owe money to), and equity accounts.

You should be able to look at each line item on your balance sheet and know exactly what it is and why it’s there. That’s how you know you have a clean balance sheet. When bankers look at this report and ask questions, they’re not just quizzing you. Typically, they want to know what’s going on so they can either clarify some things or understand the story to tell their underwriter. 

Collateral

What items are being financed? Is it something a lender can repossess if the money isn’t repaid? Typically, the better the collateral (Real Estate usually being the most secure collateral) the better the terms, the longer the amortization can be, and the lower the rates. 

Other “asset based lenders” look at accounts receivable financing, equipment financing, and financing other assets your business may have.

When buying a piece of equipment or real estate, many lenders want to see a down payment so there is positive equity in their collateral. Some lenders want 10% down while others want 20 or more percent. It all depends on the asset, the lender, and the business. 

Okay. So, those are the primary things lenders want to review when considering a business for a loan. There’s also a few things you can do to make your business “more attractive” to lenders. To lenders, these are “no duh” things. But, to all the business owners I’ve ever met who weren’t former bankers, these aren’t common sense. So here they are:

Study your Balance Sheet

There’s a difference between your balance sheet and your profit and loss statement. Your balance sheet lists all your assets, liabilities, and equity accounts. There’s two very simple rules for your balance sheet: 1 – You really shouldn’t have negative liabilities. If you do, make sure you get with your accountant to see how this happened. 2 – You should know exactly what every single line item with a dollar amount is. If you don’t, ask your accountant how the numbers got there.

Maintain a Debt Schedule

For most of the loans business’s need, lenders ask for a debt schedule. As a good rule of thumb, you should keep track of this anyway. A debt schedule is just that. It’s a list of all your liabilities (all the loans you have), who the lender is, when you got it, what’s the monthly payment, what’s the interest rate, how many months are left, and what’s the collateral. If you’re refinancing some of your debt, you need to notate which ones.

Keep Loan Agreements

More often than not, lenders want to see original loan documents. Specifically, the original “note.” This document tells lenders what the terms of the loan are, what the collateral is, and other very important details of the loan. They might ask for it. So, keep them on file.

Show a Profit

Many accountants think that by (very legally, usually) reducing their clients’ profit they are doing them a favor. However, bankers are the opposite. They want to see lots of profit; that’s usually how you qualify for the loan. If you know you’re going to try and buy a piece of real estate, for example, it might make sense to shift some expenses to your balance sheet and wait to expense them until after you get the loan done. Talk with your CPA about this, or call today!

Take a wage

When your business is functioning like a business, you (the owner) need to take a wage. Yes. Pay taxes on it. Talk to your CPA about what a reasonable wage is. When you take money out of your business outside of payroll, your balance sheet gets messy and lenders have a harder time evaluating what income you take to qualify you for the loan.

To all my lending contacts. What are some other things that business owners can do to be more attractive?