What Do Banks Look At When Applying For A Business Loan

As many business owners will tell you, a reliable source of financing is crucial to the success of companies. Business loans however, are significantly different than those issued to individuals. Because of this, the application process is much more thorough. Business owners like yourself must be prepared to have their business and personal financials under scrutiny by lending institutions. If you are concerned about what banks look at when applying for a business loan, continue reading this post.

Credit Scores

When you apply for a business loan, banks analyze your credit scores. Unlike personal loans, business loans require your personal and business credit scores. Lenders will spend a great deal of time analyzing the credit report for your business. These provide lenders an accurate measure to your financial stability and creditworthiness. This speaks to your ability to repay debts, and your promptness to do so. Analyzing your credit statements helps lenders develop your FICO score. The FICO score is one of the most important factors used in lending decisions. It is based off of your payment history, the amount of debt owed, how long you have held credit, the credit you currently have in use, and your most recent credit inquiries. Banks analyze this information in order to develop a clear understanding of your financial responsibility when you apply for a business loan.


Banks also analyze the collateral you put up. Most business loans require some form of collateral. Collateral can be used to secure almost any asset. When you fail to repay a loan, collateral ownership is shifted to the lending institution. Banks typically only loan up to a portion of the value of collateral. For example, if a bank is only willing to secure 50% of the value of your collateral, you could receive a maximum of $50,000 on a $100,000 loan. If you need a larger loan, you likely have to secure more in collateral. However, if you are unsure about your ability to pay, securing valuable assets can be risky. When you apply for a business loan, banks analyze the value of the collateral you put forward.

Business Performance

Lenders additionally analyze the performance of your business. You likely will not be accepted for a loan if your business frequently has negative cash flow. Negative cash flow leads banks to believe that you will use any revenues to pay off your current expenses, rather than the business loan. Lenders may additionally reference your growth throughout periods to assure constant profitability. Other lenders even analyze your bank statements to guarantee you have sufficient funds to pay off loans. When you apply for a business loan, prepare for bankers to analyze your business performance.

Reason For Borrowing

Many lenders will also question and examine the validity behind your reason for borrowing. To best provide responses to these figures, ensure that the loan amounts quoted are accurate and reasonable. Make certain that you are not asking for too much or too little to accomplish specific goals and projects. Additionally, ensure that your reason for borrowing makes practical sense. Look to provide references and figures that display features, costs, or other breakdowns. This speaks to your preparedness, credibility, and overall responsibility to manage a business loan. Throughout your business loan application process, prepare for lenders to question your reasons for borrowing funds.

Current Debt

Lenders also assess any debt you currently have. Your current debt is important for a number of reasons. If you are currently indebted you may use business loan funds simply to repay other debt. This leads lenders to believe you will be unable to repay that business loan. Bankers will research your ability to meet payment deadlines, and how consistent you have been in doing so. Most lenders are extremely wary to lend money to any business owners currently in financial debt. When you apply for a business loan, your current debt levels will certainly be under scrutiny.

Applying for a business loan can be a long and difficult process. When you apply for a business loan, lenders assess a number of qualities about your financial standing. With poor financial records, it is incredibly difficult to receive a low interest business loan. Lenders analyze your personal and business credit score. They analyze the level of collateral you are willing to pledge. Bankers also research the past performance of your business and your reason for seeking to borrow funds. Furthermore, bankers analyze any debt you may currently have before approving loans. Follow this post if you are concerned about what banks look at when applying for a business loan.

Leave a Reply

Your email address will not be published. Required fields are marked *


This site uses Akismet to reduce spam. Learn how your comment data is processed.

Scroll To Top