How banks look at small-business loan applications

Bankers don’t see themselves as being there to take a risk on your business, so they want to ensure that your small business have the ability to make the payments on your loan.

Based on our experience, this usually means that they check on four basic items before approving your loan. These items might not be done in any particular order, but the process goes something like this.

  • Bankers first assess your specific opportunity and the financial strength of your company – in particular, your cash flow. If you can’t demonstrate strong cash flow they will probably say no right away. Cash flow comes from revenue, so if your company is a pre-revenue start-up or sales are low, you’re probably out of luck. To evaluate your business the bank looks at your past historical, and projected future, financial statements. That’s why you need to provide past financial statements from your accountant, and a business plan with properly-prepared financial projections.
  • Next, it checks for collateral — assets that could be seized if your business goes under. No bank actually wants to seize your assets, because then the bank is stuck with a house/car/boat that it has to sell, and selling it will cost them money and take time. That’s not their business, but it does provide security.This is one of the reasons why the owner has to almost always personally guarantee a loan for a small business – the business itself doesn’t have much in the way of assets. If your personal financial situation is weak or worse, in a mess, you probably won’t get a loan no matter how well everything else checks out. Banks can obtain a comprehensive report on your personal finances in a jiffy, so don’t try to mislead them.
  • Banks will also examine your management team. As the old saying goes, people invest in people. If your team doesn’t have all of the skills to do a good job of executing the business plan, the bank could take a pass on the loan.However, bank loan application forms usually stress financials, not your management team. Attaching your own business plan that profiles your management team, their track record, and their qualifications lets you get this point across.
  • Finally, the bank considers your industry. Some industries – like restaurants – are riskier than others, and the bank can have a policy that it won’t lend to certain types of businesses. Or the bank may be over-invested in some industries and be trying to diversify its portfolio of loans to reduce its overall risk.

So, it’s up to you to explain why your industry is attractive to investors, how you have identified a lucrative opportunity within that industry, why your management team is qualified to seize that opportunity, how you be able to make the payments, and, if all else fails, how you can guarantee the loan. The tried and true way of explaining all this is to have a solid business plan in hand before you apply for a loan. You will still have to fill out the bank’s loan application form, but you can go through your business plan with the loan officer to ensure your business is presented in the best possible light.

About Market Metrics

Market Metrics Inc. helps knowledge-based businesses with strategy, planning and innovation. We offer our clients a unique combination of top-shelf professional skills, competitive pricing, and real-world industry experience in business planning, marketing, and technology.

The consultancy was founded in 2003 by Greg Graham, a seasoned strategic marketing professional. Greg is a Certified Management Consultant (CMC), a Fellow of the Ontario Institute of Management Consultants (FCMC), and an Accredited Small Business Consultant (ASMEC) in the United States. He holds MBA/BEE degrees plus a Certificate in Strategic Management.

Prior to founding Market Metrics, Greg's 21 years of corporate experience encompassed tech start-ups through Fortune 500 companies. He is an expert in subscription-based business models (including SaaS). Greg frequently performs consulting engagements on behalf of the National Research Council's Industrial Research Assistance Program (NRC-IRAP).


One Response to “How banks look at small-business loan applications”
  1. Peter Wilson says:

    Interesting article, thanks for sharing