Raising Money

Business Credit Evaluation

When a creditor considers loaning your business money, what do they think about? This article explains what lenders want to know before they will agree to even consider lending money to a small business.

You've probably heard that in order to get a business loan you have to have a ton of things in place.

That's true. However, what many small business owners looking for business loans don't realize is that business credit analysis typically takes a phased approach.

In other words, they evaluate some very basic business credit score questions before they move on to a detailed business credit evaluation.

As such, it's important to think like a banker and start with those initial filtering questions before you worry too much about everything else you have to prepare in order to get a business loan.

The Most Important Business Credit Evaluation Criteria

Before a bank will provide you with a small business loan or business line of credit, the loan officer must feel satisfied with the answers to these questions.

  • Who are you? - What is your character -- will you want to repay the loan? Most creditors will only consider providing you with a business loan if you have a reputation for integrity, responsibility, and have good references in the local community.
  • How competent are you? - How capable are you in managing the business -- will you be able to repay the loan? The lender will assess whether you know what you are doing in running your business. The number of years you have been in business will be considered. Some lenders even go as far as to "mystery shop" your business to see how well it is run.
  • What's the business loan purpose? - What is the specific purpose of the loan? Is it a short or long term need? Many loan provisions explicitly exclude certain business loan uses. For example, maybe you are not allowed to use the business loan to pay off existing debts or buy property or use the money for personal expenses. The lender wants to know that the proceeds from the small business loan will be used to do something that will enhance your ability to pay them back.
  • How do you approach capital usage? - Do you have a clear financial plan and forecast showing why you need the loan and how you will pay it back? If you don't have this in place, you're wasting your time applying for small business loans or other types of small business financing.
  • How much do you want? - Is the loan request large enough to cover any unexpected change in your situation, but not so large that its repayment will be a heavy burden?
  • What's the outlook for your business? - What is the general economic outlook for your business and industry? Are there any economic events that could occur that would greatly reduce your ability to pay back debts?
  • Do you have skin in the game? - Do you have a reasonable amount at stake in the business? Or are you willing to let it go down the tubes and walk away from your obligations?
  • What happens if you can't pay the loan? - What collateral is available to secure the loan amount? Most loan applicant must be willing to secure their business loan with assets. Typically, the amount of security required will depend on the type of business enterprise and the circumstances.

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