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small business, business loan

What affects a lender's decision when seeking a business loan?

Capitalise Sep 12, 2023

If you own a business, it’s likely at some point in your business’ lifecycle when you’ll be seeking external funding. Whether you're looking to expand, invest in new equipment, or simply manage cash flow, securing a business loan can provide the boost your business needs. 

However, it’s important to understand what factors affect a lender's decision, so if you’re looking to get a business loan, you’ll know how to prepare. Or if you’ve recently been declined for a business loan, you’ll know what factors to consider next time. 

Creditworthiness and business credit score

One of the first things lenders look at is the creditworthiness of your business. This involves assessing your business credit score, which reflects your business's financial history and payment behaviour. Lenders will be able to assess the likelihood of your business repaying the loan on time, based on your historical payment performance of your customers and any other existing debts. 

A solid track record of responsible financial management increases your chances of approval. While it's beneficial to not have adverse credit informaiton on your personal credit profile, there is a difference between personal and business credit scores. When it comes to a business loan, lenders will care most about your business' crediworthiness


Financial statements and payment performance

Lenders will examine your business's financial standing, often requiring your business’ annual financial statements, balance sheet and business bank statements. These documents provide insights into your business's profitability, liquidity, and overall financial health. Demonstrating consistent revenue growth, healthy profit margins, and well-managed expenses can reassure lenders about your ability to repay the loan.


Purpose of the business loan

Clearly articulating the purpose of the business loan is an important step. Lenders want to know how you plan to use the funds and how it will contribute to your business's growth. Whether you're looking to invest in new projects, hire more staff, or acquire assets, a well-defined plan can instil confidence in lenders regarding the potential return on their investment.


Collateral and personal guarantees

Lenders can require collateral or personal guarantees as a form of security in case the borrower defaults on the loan. Collateral can include assets such as property, or equipment. 

A personal guarantee involves the business owner promising to repay the loan if the business fails to do so. Often a business owner will need to be a homeowner so that their personal guarantee holds some weight.

Offering appropriate collateral or guarantees can increase your chances of getting approval for a business loan and potentially more favourable terms.


Industry and market analysis

The industry your business operates in and the market conditions can play a significant role in a lender's decision-making process. Lenders may evaluate the stability, growth prospects, and trends within your industry. A comprehensive analysis of your market, including competition, target audience, and potential risks, can demonstrate your understanding of the market landscape and your ability to navigate challenges.

It's worth bearing in mind that many lenders and business loan products are tailored towards specific industries. Working with an expert in the lending market will help to ensure that you’re applying to lenders that specialise in your sector. 
You can speak with one of our funding specialists to find a lender suited to your industry. 


Debt to-income-ratio

Lenders assess your business's debt-to-income ratio, which compares your business's debt obligations to its income. A lower ratio indicates a healthier financial position and a greater capacity to manage additional debt. This ratio is a crucial factor in determining how much debt your business can reasonably take on.   

Securing a business loan involves a thorough evaluation of multiple factors by lenders. Demonstrating your business's creditworthiness, financial stability, purpose of the loan, and industry understanding can significantly influence a lender's decision. By presenting a clear, comprehensive, and well-prepared business loan application, you can increase your chances of obtaining the funding you need to achieve your business goals.

It's important to remember that each lender will have significantly different criteria, it can be a lengthy and complicated process to tailor multiple applications.

When you apply for a business loan through Capitalise, you’ll receive dedicated support from a funding specialist who will put together your application to be sent to multiple lenders, streamlining the process. They will ensure you meet the criteria for each lender to maximise your chances of approval.

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