How To Articles

How to Look Good to Lenders

Small businesses need to borrow money for all sorts of reasons. Whether it's to expand their reach, upgrade their offering or some other reason, borrowing money requires you to make a favorable impression on the lenders behind the money. Your business and what you are proposing are the most important aspects that lenders take into consideration, but there are some things you can do make your case more convincing.

1. Preparation and paperwork
   
   What?s really impressive to a lender is a potential borrower who has a complete, well-organized package. You'll need to have at least three years of financials, including tax returns, financial statements, payables and receivables, cash flow statements, etc. If you have everything the lender is looking for put together in an organized fashion, you and your business will appear sophisticated and trustworthy.


2. Accounts payable and accounts receivable
   
   Lenders don't like to see businesses with payables and receivables that are not in order. They like to see businesses with a well-managed cash flow and an aggressive pursuit of accounts receivable. Basically, as creditors, they don't want to always be waiting around for you to pay them because you're always waiting around to be paid by others.


3. Current value of assets
   
   Lenders don't necessarily care how much you paid for something when it could have appreciated or depreciated in value. Instead they want to know what your assets are presently worth. They want to know what they could be sold for should your business need to be liquidated at some point. So have an up-to-date list of all assets owned by the business and their current value.


4. Loan-to-value ratio
   
   Loan-to-value ratios vary by industry. High-tech businesses with rapidly depreciating equipment are valued differently than a large trucking business that has assets with a much longer shelf life. Look at your industry and try to understand what is considered a reasonable loan-to-value ratio for your industry and what is considered excessive.


5. Debt-to-income ratio
   
   It takes profits to repay a loan, but if the repayments require too high a portion of the business? profits, then that can lead to bigger problems. That's why a debt-to-income ratio of 40 percent is preferable to a lender. This means that if your monthly profit is $10,000, no more than $4,000 of that should go toward repaying the loan.


6. Interest and principal repayment
   
   Many businesses think that they are in good shape if they can show that they'll be able to adequately pay interest on the loan, but that's not often enough for many lenders. They want to see that you are able to cover both the loan interest and a portion of the principal.


7. Personal credit history
   
   Good personal credit can definitely improve your chances of receiving funding, but a poor credit history can throw your chances in the opposite direction. If you have a few indiscretions in your credit history, try to hold off on your loan for a while if possible. Going a while with a clean credit history can make a big difference.