Lender checklist

Applying for a business loan involves more than just filling out a loan application. Lenders are concerned about potential borrowers’ ability to repay the loan. Prior to lending, lenders assess whether the prospects or potential borrowers can operate a business and know the risks, as well as understand what steps have the business owners have taken to minimize chances of failure.

When a potential borrower inquires with banks or most alternative lenders about obtaining a business loan, lenders want to know what type of business is it and if the borrower has a written business plan with financials.

More importantly, they want to know how much money the borrower needs and how much the borrower is willing to put down, which is often referred to as having “skin in the game.” Based on these quick points of assessment, the lenders determine the feasibility of continuing to work directly with the prospect or to redirect them to resources like SCORE for mentoring.

To protect their investment or before approving small-business loans, lenders assess borrowers’ credentials in key 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. Most business plans should contain financial projections up to three years, depending on the lender’s requirement. If it’s an existing business, include the recent two to three years of profit and loss statements, at the very least.
 

Credit history verification

A very good credit history with a 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 a lower FICO score. If it’s an existing business, lenders may verify business credit history, if applicable.
 

Experience requirement

Most lenders require 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.
 

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-income ratio to project a borrower’s ability to make monthly payments. If it’s a loan for an existing business that is looking to expand, lenders will ask for two to three years of business profit-and-loss statements.
 

Assets verification

Assets could be items of value applied toward 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. 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 for 25 to 50 percent, which could be a combination of personal or reserve funds and personal assets of value.

If this is an existing business with no outstanding loans, the lender will also take under consideration existing business income and business assets of value as part of the collateral.

If a prospect cannot meet some of the lending requirements to obtain a small-business loan, then the alternative option could be a business partner or a qualified manager to apply for the business loan. If a business partner or a qualified manager gets approved as a borrower, he/she will become the primary responsible party to repay the loan.

This article appears courtesy of SCORE, Mentors to America’s Small Business. Get free advice from more than 11,000 volunteer business mentors in more than 300 chapters across the nation at www.score.org. Raj Tumber is a small business mentor in the Las Vegas chapter of SCORE. He specializes in strategic business development and is currently authoring a book on the topic of strategic development. Other areas of expertise include technical administration, consumer electronics, investigations and analytical science.