4 Key Factors Banks Consider When Approving Business Loans

If you’re considering applying for a bank loan to fund your business, it’s helpful to understand what financial institutions look for when deciding whether to approve your application. Banks don’t just consider the viability of your business idea; they focus on your ability to repay the loan. Here’s an overview of the key factors that banks evaluate before offering business loans.

1. Your Business Track Record

One of the first things a bank will assess is your track record and reputation. This includes your personal credit history, past debts, and repayment history, as well as your business experience and reputation. Banks will also want to review your financial history, including any previous loans you’ve repaid. They may look into past businesses you’ve owned or jobs you’ve held, along with any legal matters you’ve been involved in.

While some institutions may refer to this as “character,” it’s more about proving that you have the ability to repay the loan, rather than your personality. You should also ensure that your business’s online presence, including your website and social media accounts, accurately reflects your business, as banks may check these as well.

Another factor to consider is any outstanding tax debt or arrangements with government agencies. If you have a significant tax debt, securing a loan could be more difficult.

2. Your Ability to Repay the Loan

Banks want to know that your business has the financial stability to repay the loan. They will review your financial statements, previous loans, and your business plan to assess your repayment capacity. If your business is already established, they will look at past financial performance, such as balance sheets, profit and loss statements, and bank statements. Cash flow projections and BAS statements can also help strengthen your case.

A solid, up-to-date business plan is crucial for demonstrating how you plan to use the loan and repay it. It’s a good idea to prepare as much documentation as possible to back up your application. This includes showing how your business will grow with the loan and how it fits into your long-term goals.

3. How the Loan Will Be Secured

Lenders typically require collateral to secure a loan. This could include assets like property, cash, inventory, or accounts receivable. The value, age, and location of these assets will be evaluated to determine their worth. Secured loans tend to come with lower interest rates and higher borrowing limits compared to unsecured loans.

Unsecured loans don’t require collateral but tend to have higher interest rates and are generally for smaller amounts. If you don’t have assets to secure the loan, offering other forms of documentation such as a well-organized balance sheet could improve your chances of approval and possibly reduce the interest rate.

Creating a balance sheet that lists your assets and liabilities, along with realistic asset valuations from a professional appraiser, will help demonstrate your ability to secure the loan.

4. Your Overall Financial Position

Banks will assess your overall financial situation, including your net worth and liquidity. This can involve looking at your available savings, investments, and any personal deposits you plan to make. Having a strong financial position helps assure the lender that you can make repayments if necessary.

Final Advice

As Steve McLaren, an SBDC business advisor, explains, the decision to approve a loan isn’t just about the idea behind your business; it’s largely based on whether the bank believes you can repay the loan. For new businesses, it’s important not to get discouraged if your loan application is rejected. Remember that loans are just one way to fund a business—other options include self-funding, family loans, crowdfunding, and selling equity.

If your application is declined, take the time to ask the bank about the reasons for refusal. This feedback can be valuable for future loan applications. It’s also crucial to have a proactive discussion with your bank or a financial broker to get a clear picture of what funding options are available to you.

Ultimately, banks want to know that you have a financial stake in your business. Even with the best business ideas, having a personal investment in your business will improve your chances of securing funding.