What do banks analyze when deciding on approval for commercial loans? What can affect their decision for my loan? This article will attempt to elucidate the basic parameters of analysis to provide business owners with some context and knowledge to better prepare them before a request or application.
A general rule of thump is that as the dollar amount of the request increases, so does the analysis. Also, the richer you are and the more profitable your company ease, the easier it is to get a loan. Obviously, that is self-explanotry, but as your business grows and the more money you make, the more leverage your will have over banks, and the more they will compete for your business. The companies that banks love to lend money to are those who do really not need the money. The more you really need the money, the harder it is to usually receive financing.
Let’s dig in to bank analysis and credit decisioning. Banks, on the credit side, care about receiving full repayment for their loan and being adequately secured in a downside scenario. The last thing a bank wants to do is to put you into default and take your collateral. That process is time consuming, expensive, and banks typically do not receive full repayment of what they lent to you. In addition, as your company underperofrms, banks have to set aside (internally) additional loan loss reserves that significantly reduce the profitability of your loan. So, what do banks want? They want you to make a lot of money, pay them bank, and borrow again for future needs, in addition to using other bank services such as deposits and treasury.
So, banks want to avoid all of the issues with a default, so they spend time on analyzing you as the owner, your history, your compan’s performance history, collateral coverage, your personal financial support, and downside scenarios. Your personal history is important. How long have you been in the industry? How long have you owned/operated the business? Banks do not want to lend to a “start-up” or a new venture, unless there is very strong guarantor support. Banks would like to see a stable company with a good history of profitable operations. Your company’s performance will also affect how much debt your company can handle. A bank will analyze your company and the request, typically via software, to determe various financial ratios that provide a risk profile of your business. For example, if your business makes $200,000 per year in EBITDA, you probably won’t qualify for a $2mm loan, no matter how good the collateral might be. You could qualify for a $500,000 loan, depending on other factors. The point is, overal leverage and debt burden will impact credit decisitioning.
Other important factors would be the nature and type of collateral. Are you financing heavy equipment? Are you requesting financing for a building purchase? When looking at collateral, the bank has to ask itself, can we sell this in a downside scenario and what could we receive for it? The can in can we is an important variable. Does the collateral have another use? Is it an office building? Or is it a local amusement park in a very small town? Are you building a storage unit facility? Or are you building a trampoline park for kids? Are you putting in a sushi restaurant in a small town? Or are you opening Domino’s pizza? If your request is more speculative in nature, you might have to look outside of traditional banks for financing or looks to perhaps an SBA guaranteed loan.
In summary, banks take a holistic approach to underwriting, especially as the dollar value of the request exceeds $1mm. A host of factors can improve or undermine your ability to receive financing and working with a company such as MintFi can help you improve the areas that may be impeding your ability to reach your dreams and grow your business.