What Lenders are Looking for from Business Owners

A business loan is a proven way of securing the finance needed to get a business up and running. Before you can access the funds you need, you’ll have to convince a financial institution that your business is worth backing.

Achieving this goal requires preparation but don’t be put off by the process. The majority of the preparation work needed overlaps with the due diligence needed to start a business. You’ll need to consider areas like your business plan, cash flow projections, and even your own financial history. While working as a Business Plan Advisor for SBBC, I get common questions from business owners about the lending process. Let’s dive into these questions, and clarify what lenders are looking for from business owners.

What are lenders looking for when deciding on a loan application?

First and foremost, they’re looking for a well-developed business plan. In addition to that, the other important piece of the puzzle is two years’ worth of financial projections for the business. These financial projections should be two-fold. They should include a sales forecast on a month-to-month basis, alongside your start-up costs, cost of goods sold, your operating expenses, and your net income at the end of the month. You need to prove that your business plan is a viable one and show how you plan to use the loan to launch or grow your business. Lenders like to see a breakdown of the funds used and that you have done your research on the various costs including equipment, supplies and marketing costs, etc.

At SBBC, we have a handy Business Plan Template and Cash Flow Forecasting Tool you can download for free.

Another thing that’s super important is the character of the entrepreneur looking for the loan. It’s vital that you can highlight your skills and your experience. Most of all, you need to demonstrate you have the competence to run this business, and run it well. When I meet with Business Plan clients here at SBBC, I really try to impress upon them the need to highlight the person behind the business. Don’t be afraid to toot your own horn!

Lenders will look to aspects like your credit history, your credit score and your personal net worth, so it’s important to ensure they’re in a good spot before you start the process.

What documents should an entrepreneur prepare in advance when meeting a lender?

If you’re looking for a loan, they’re going to want to asses your ability to pay back that loan. In your business plan, you have to show that what you’re looking to do with the business is feasible. Perhaps you’re offering a proven product or service – this would be looked upon favourably by a lender.

If it’s not a proven product or service, you’re going to want to have market research to back up your assumptions. The viability of the business can sometimes not be enough. You’re going to need to make enough to not just sustain the business, but to make enough profit you can afford to pay back the loan.

An important form that many lenders will look for is called a Personal Statement of Affairs, or PSA. This form helps them to determine your net worth, and lets them assess your assets and debts. They’ll consider how much you make on a monthly basis, what your monthly liabilities are,  and how leveraged you are with current debt.

The other thing they’ll want to know is how much saving and investment you have; whether you’re renting or you own a home, and how much equity you have in that home. All of this information is contained within that PSA document but it’s worth mentioning the PSA is only valid for 90 days. They may also run your credit score, but be careful you aren’t shopping around too much and having that score pulled too many times, as it does hurt your credit score.

Other documents you’ll want to prepare include your business registration, articles of incorporation (if you’re incorporated), or a partnership or shareholders agreement (if applicable). If you are in a partnership, or require a co-signor, the other partner or co-signor will also need to complete the PSA form.

You may need to provide a copy of your most recent Notice of Assessment from CRA to show that your taxes are paid and up to date and you may need to include any offers to lease of a location (do not sign the lease agreement until financing has been approved) or quotations for any leasehold improvements and/or equipment.

How do I know how much to ask for in a business loan?

This is a really important issue to get clear on, and it all boils down to the business plan and your cash flow projections. Part of developing a strong business plan is looking at every aspect of the business. You’ll be assessing areas like sales projections, projected cost, pricing strategy and so on. You’ll want to make sure you have enough funds to not only cover all your operating expenses and cost of goods sold, but also unexpected expenses.

All businesses are cyclical. There’s going to be busy months, but there’s also going to be lean months where your sales could drop significantly. Cash flow projections are so important because it helps you to determine your current financial obligations as well as plan for the future. They should be done on a monthly basis over that two-year term. Some entrepreneurs make the mistake of lumping it all into one year and that just isn’t realistic.

Take restaurants as an example. Typically, they’re super busy from September to the end of December. Then January hits, people have bills to pay and the weather is cold, so people stay home and don’t spend money. When that revenue drop hits, you’re going to need to have the cash to pay ongoing financial obligations like rent, payroll, loan payments, etc.

Once you’ve gone through your cash flow projections, including a conservative and worst-case scenario projections, you will have a better picture as to the loan amount needed.

How much of my own money will I need to put in?

It’s really important to have an owner’s contribution to the project because the lender will want to know that you have skin in the game. Most traditional lenders will want to see you put in at least 30% of what you’re asking for or project costs. Some developmental lenders may expect as low as 10% of start-up costs.

Say you’re looking to get a $50,000 loan for your business. If you can produce a bank statement showing you have $10-$15k you’re willing to put in, it shows you’re serious and that you have faith you’re going to succeed.

How do I know what terms and conditions are right for my business and situation?

As we’ve seen in the news recently, the cost of borrowing is rising due to increases in interest rates. It’s never been more important to do your homework on rates, term lengths (repayment period) and conditions of the loan before making your decision.

Different lenders will have different interest rates. They also offer loans of different lengths. Refer back to your cash flow projections and plug in your monthly loan repayment amount (this includes both interest and principal amount) and see if this is sustainable for your business.

Look at dedicated business lenders like Futurpreneur. I know they offer loans of up to $60,000, but what really sets them apart is that in the first year, you just pay interest on the amount you borrowed. An interest only payment could be a significantly reduced amount for the starting business owner.

What banks should I approach for a loan?

Traditional banks will typically have a higher benchmark in terms of credit scores and require collateral to secure the loan rather than developmental lenders. When you’re looking at your options for which institution to approach, it’s recommended to start with lenders and credit unions that are known for working with entrepreneurs as they may provide more flexible conditions and support. Here in BC, that’s the likes of VanCity, WeBC, Futurpreneur, Community Futures, and BDC – they are more willing to take on more risk if you have a well-developed business plan and realistic financial projections.

How Small Business BC Can Help

SBBC’s Business Plan Advisors work with entrepreneurs to help them develop and perfect their business plans. These documents can be presented to lenders or investors to help secure the capital needed to achieve your business goals. Learn about our Business Plan Services, and how they can help your business.