Need a Small Business Loan?
Start thinking like a lender to boost your chances of success. Hint: Cash flow is king.
Ever been denied for a small business loan? You’re not alone. Rejection rates among online lenders and commercial banks range from 43 to 73 percent, depending on the lender and their appetite for risk.
Perhaps you’ve been rejected without any guidance about what you can do to get approved. This is not uncommon. Nearly 25 percent of applicants denied for a loan report they have no idea why they were rejected.
So what can you do to increase your chances of getting approved for a small business loan? Think like a lender and learn what they’re looking for.
At their core, lenders are risk managers. When assessing your loan application, they’re measuring the level of risk associated with your ability to repay the loan based on the information you provide.
Most lenders were taught to underwrite loans based on the “5 Cs” of credit: cash flow, cash balances, collateral, credit and character.
The cash flow of your business is the single best indicator of your company’s ability to repay the principal amount of your loan plus interest within an agreed upon timeframe.
Lenders want to see a solid history of net cash flow that can clearly satisfy the loan you’re applying for. Net cash flow is simply the amount of cash that’s available after you’ve paid all of your outstanding business expenses.
From a loan approval standpoint, the operative words are “satisfactory history.” Some lenders want to see 12 to 24 months worth of history. Lenders who are willing to assume more risk will rely on just 90 days worth of bank transactions, which can often be verified online; this can lead to quicker decisions through advanced automation.
In addition to positive cash flow, lenders want to see a history of your ability to maintain a positive bank balance. Ideally, they want to see a balance that’s increasing, which is evidence that you’re growing and getting good at managing cash flow. This is especially important if your business is subject to market swings or other dynamics that can lead to less predictable cash flow.
Collateral (Use of Funds)
Depending on the strength of your cash flow and cash balances, along with your business profile, lenders may want to know what you’ll be using the loan for. Investing in assets that increase sales and strengthen cash flow can be a compensating factor for weaker historical cash flow and balances.
Depending on your operating history and cash flow, a lender may require an actual assessment of collateral prior to loan approval. This is especially true if you’re offering assets that appreciate, such as real estate.
Assets that depreciate quickly, like equipment and inventory, won’t do much to strengthen your loan application. With this type of collateral, the lender will focus more on the cash flow of your business.
Credit & Character (Business Profile)
When it comes to lending decisions, your business profile is important. Most lenders require that you’ve been in business at least a year, though some will make an exception for younger companies if your business is getting traction and showing strong revenue growth.
When assessing the credit and character of your business, lenders will also consider the industry you operate in, makeup of customers, history with vendors, and online reputation.
Businesses operating in industries that are subject to market swings and scrutiny are considered higher risk than those with more predictable patterns and favorable coverage.
A growing, diverse customer base with repeat customers represents less risk than a business with nascent revenue and no repeat customers.
Lenders want to see a positive payment history with your vendors, as it leads them to believe they can expect the same from you. Likewise, if they see a negative history, they will be concerned the same will happen with them. Not many vendors report to the business credit report bureaus — be mindful of the ones that do.
Good online reviews from customers and employees can strengthen your application, especially when you plan to use the funds to serve more customers and keep your team happy and growing.
The “5 Cs” is a traditional assessment of credit based on where your business has been, but thankfully a growing number of lenders are using new technology to analyze where your business is going. This is good news, as it can help more businesses qualify for financing.
While traditional lenders tend to make decisions based solely on your past cash flow, more lenders are starting to take future cash flow projections into account. Cash flow projections are an opportunity to show these lenders where you expect to be with the help of their funds, which may tip the scales in your favor.
Consider this: If your current cash flow doesn’t support the loan repayment schedule for the amount you want to borrow, you’ll need to show the lender how your business will get to a place where you can comfortably make those payments.
To be clear, we’re not saying that lenders are turning into venture investors. An operating history with positive cash flow will always be the most important factor for lenders. However, this new model allows you to combine a positive history with plausible projections to build credibility in the eyes of lenders so you can obtain the capital you’re looking for.
Tools to Help
In order to boost your chances of qualifying for a small business loan, your best bet is to start looking at your cash flow through the eyes of a lender. Getting a handle on your current cash flow and making future projections doesn’t have to be difficult.
FINSYNC’s intuitive online tools can help you easily visualize, manage and project your company’s cash flow so you can gain insights that will optimize your chances of getting the best financing to grow your business.
FINSYNC has a growing network of lenders who rely on its technology to make quick or automated decisions based on your past, present and projected cash flow. As your cash flow improves, your access to additional capital grows with you.