Because of the growing demand, most lenders these days are tightening their policies to the small business loan market. This is so they could reduce the risks associated with issuing small business loans. If you want to apply for a small business loan, it is best that you understand how the risk assessment process that lenders use works.
Lenders first look into you business capital. As business owner, the capital that you inject to your own company sends a message of confidence and dependability to lenders. It shows your ability to repay the small business loan that they’ll approve for you. Be sure that your business net worth and equity will impress them and blow them away. If the business owner himself will not be willing to invest in his company, then no other third party lender will be willing to do it for your business too.
Capacity is another factor that lenders will look into. Lenders usually check and review the daily cash flow of the business. This is for them to determine different courses of repayment that is available for the borrower. Capacity is the business’ or individual’s ability to pay back the small business loan.
Lenders also look into internal and external conditions that affect the small business. Lenders review the loan conditions whether the loan will be used for expansion or to buy equipment. External factors that lenders consider may include competitors, economic condition of the industry, customer base, liabilities and more.
As with anything else, character is also very important when trying to apply for a small business loan. Lenders assess also if the borrower has a trustworthy character. Related to character considerations are the candidate’s personal and business credit history, education, references, and business experience and knowledge.
Small business loans may be classified as secured or unsecured. Mostly fall under secured because lenders often ask for something of value from the borrower, collateral, to secure the amount of the loan on the part of the lender. The collateral helps reduce the risk of lending and it may come in different forms of assets. It may come in the form of company equipment, inventory, account receivables, real estate property, or even securities. Some lenders may require borrowers to include a personal guarantee which is a signed document to serve as additional reassurance of repayment. Borrowers may feel that providing collateral when getting small business loans is troubling. Lenders however don’t really want to exercise their power to seize properties or assets as much as possible that they’ll need to liquidate later on. They want to find alternative modes of repayment as much as possible.
If you make sure that you have all of these five factors covered when you apply for a small business loan, then you are most likely to get approved for your loan. Small business loans are really easy to apply for and get approved when you know how lenders assess and review applications and the qualifications of borrowers. Go now to your nearest lenders and see how you can get that small business loan to expand your business.