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What Lenders Look for in a Loan Application

Whether it’s to fund a startup operation, expand an existing business or manage a rough patch, most small businesses will find themselves in need of a loan at some point. To improve your odds of approval, make sure you have well-documented financial records and a solid business plan that incorporates the "Five Cs" of business credit.

Capital

You'll likely need to put up a certain amount of money—perhaps from personal savings, an equity loan on your home or money from friends and relatives—as a down payment in order to borrow money. Not only may a certain amount of capital be required by law, but lenders also want you to have some "skin in the game." They may be more willing to take a risk on your business when you're willing to risk your own money as well.

Collateral

As a secondary safeguard to capacity, lenders may require a certain amount of collateral—basically assets that can be sold, with the proceeds going to the lender should you default on the loan. Collateral may include inventory, vehicles, cash, investments, receivables, real estate and capital equipment such as machinery. Some entrepreneurs use their personal homes as business collateral, but beware of the risk of losing your home if you're unable to pay back the business loan.

Character

Lenders review your education and experience as well as personal and business credit history. They may look more favorably, for example, if you have an existing business or you've managed a similar type of business in the past and can demonstrate a successful track record. However, that doesn't mean that you can't get a loan if you're switching fields or starting a new business. In those cases, your personal credit history and the general impression you make on the lender may weigh more heavily. It may be helpful to get character references from respected community members and former employers to bolster your case.

Capacity

Lenders want to be repaid, so your capacity to repay the loan is a critical factor in determining approval. Capacity will be based largely on the past and projected cash flow of an existing business. With a new business, it's important to include a detailed explanation of how the business will be able to repay the loan by including projected expenses and income based on solid research, not just wishful thinking.

Conditions

Finally, your business plan should detail general market conditions and your business' competitive edge. Demonstrating that you've done your homework—such as researching the competition, determining the demand for your product or service, developing a sales strategy, creating a pricing plan and assembling a team of financial, marketing and tax professionals—will go far toward convincing lenders that your plan is viable.

Business Membership

A business membership with Navy Federal Business Solutions is exclusively for Navy Federal Credit Union members. As a business member, you have access to small business professionals, competitive business credit offerings and more.

Learn More

Check out more guidance on how to write a business plan.

Disclosures

This article is intended to provide general information and shouldn't be considered legal, tax or financial advice. It's always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.