Credit for Small Businesses

In evaluating whether to grant your loan request, your lender will review and evaluate a number of credit factors. Potential borrowers should familiarize themselves with these factors and make certain to take them into consideration when putting together their loan proposal.

• Equity investment is used to assess whether a company’s level of debt is appropriate in relation to the amount that the business loan applicant has invested in his or her business. Weak equity investment can be viewed as a signal that management is not committed to the success of the business. Sufficient equity is particularly important for a new business. To check this, lenders will look at the debt-to-worth ratio of your application, which compares how much money the lender is being asked to lend (the debt) to how much you, the owner, has invested (the worth).
• Earnings requirements are important measures because a business cannot continue to operate if it spends more money than it takes in. Proper cash management ensures that the right amount of cash is available when the need arises. Loan applicants should be able to demonstrate their ability to repay the loan from the business operations. For a new business, it’s particularly important that you detail the assumptions underlying how you intend to generate revenues to meet the repayment schedule.
• Working capital is defined as current assets minus current liabilities. Also referred to as net current assets, working capital measures what is available to pay a company’s current debts. It represents a cushion of protection for the creditor.
• Collateral is security that you pledge for repayment of the loan. Typically, collateral must be adequate to secure the loan and can consist of both business and personal assets. Certain types of loans have personal guarantees requirement for owners, as well as individuals who hold key management positions.
• Resource management, otherwise defined as character, is a prime consideration when determining whether to grant a loan. The ability of you and other owners/partners to manage the resources of the business is dependent upon your education, experience and motivation. Key ratios that most lenders will look at as an indication of resource management include debt to worth, working capital, the rate at which income is received after it is earned, the rate at which debt is paid after becoming due, and the rate at which the service or product moves from the business to the customer.