How Banks and Lenders Decide Whether to Finance a Small Business Loan

As the economy slowly regains a boost with signs of recovery analysts are seeing, the lending market has become a little more welcoming to small business owners. An increasing number of start-ups and small scale entrepreneurs are reportedly turning to banks, lenders and financing institutions to kick-start their business or get the enterprise all set for expansion.

As it has predominantly been the practice, small business loan applications requires more than just filling out a form and talking to potential lenders that can help back business goals and plans in the form of financial backing. Lending is, in its own, a business – and a recovering industry at that, given the global economic slump that affected the sector.

Banks and lenders enthusiastically advertise about how they are willing to assist small business owners. They exist for the purpose for providing such assistance, but there are specific requirements that borrowers need to meet in order to be qualified small business loans of any type and for any purpose.

Before deciding to accept loan applications, granting the seal of approval and releasing the funds, lenders make it a point to always make assessments. These evaluations are ways to ensure that potential small business owners who seek to borrow money will actually have the means to repay the loan promptly.

In addition, lenders are keen about whether or not a borrower has the right kind of business in mind, as well as the experience, background, skills and strategies that will allow them to operate the venture profitably and ultimately pay the loan. There are risks associated with every step of the lending and borrowing process, and lenders want to be assured that there are specific ways a small business owner will take to reduce such threats.

To this end, potential borrowers can expect banks and lenders to delve deep into their background, past and present financial records, capacity to operate a business, and other information that will ensure them of an individual, a group of people or an organization that can legitimately run the enterprise. Lenders will also look into the profile of the start-up or existing business and decide on whether or not companies are able to meet requirements in the long run.

Score Small Business lays out the essential documents and other requirements that potential borrowers will have to be ready with and present before a lending institution to demonstrate eligibility:

Overall, in order to protect their investment or before approving small-business loans, lenders assess borrowers credentials in these areas:

Business Plan Request

A written business plan covers several elements of business planning such as business strategy and implementation, market research, competitive analysis, expenses, financial projections and more.

Credit history Verification

A very good credit history with high FICO score is required to get approved for small business loans. Most lenders prefer that a potential borrower’s FICO score be at least around 700, the higher the better. Some alternative lenders may settle for lesser FICO score.

Experience Requirement

Most lenders require for the potential borrowers to have at least two years of experience in the field of work relevant to the type of business they plan to start. The experience could be through a recent employment or business.

Income Verification

Potential borrowers must have a stable source of income through current employment, business, investments, retirement or other tracked methods of earnings. Lenders use income data and current debt-to-ratio to project a borrower’s ability to make monthly payments.

Assets Verification

Assets could be items of value applied towards collateral for obtaining a business loan. Equipment of value, financial savings, personal and business property with value or equity are a few examples of assets.

Down Payment

Lenders do not offer 100 percent small-business loans. They want to see some skin in the game. How much money have you invested and how much of your own money are you willing to put down? Generally speaking, they require potential borrowers to be responsible 25 to 50 percent, which could be a combination of personal or reserve funds and personal assets of value.

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