A potential business lender reviewing a small business loan application will analyze whether the business applicant has or will have the ability to repay the borrowed money. This analysis includes a review of the business plan, the business assets and liabilities, and the potential business revenues. For most small businesses, this analysis also includes a review of the business owners and operators. In a nutshell, the potential lender wants a thorough examination of whether the business will have the ability and likelihood of repaying the borrowed funds, and if the business doesn't, whether the individual business owners will.
Credit History
Of vital importance to a potential business lender is the credit history of the business loan applicant. A relatively new small business will have little to no credit history. However, a business that has operated for several years and has taken out and repaid other loans and financial obligations will have a good credit history. This makes it easier to get a business loan, but a poor credit history, or no credit history at all, does not necessarily preclude a business from obtaining a loan.
Individual Owners
Small businesses with no credit, little credit, or poor credit can work around that by providing personal guarantees from individual owners or operators with good credit. The risk with this approach is that the owners who provides a personal guarantee becomes personally responsible for repaying the business loan. This means that if the business fails, the owner will still have to repay the loan. Business lenders also will review the qualifications and credentials of the owners and operators of the business in order to verify that these individuals have what it takes to run a profitable business.
Potential Revenue
A business lender is not going to provide a loan unless it is convinced that the business is going to produce future revenues that can be used to repay the loan. To analyze potential future revenues, the business lender will review the past business revenues and the future business plan. Generally, the higher the past revenues, the less impact the business plan will have on the application. The reverse also is true. A new business with no history of revenues, or an existing business with a poor history of revenues, can work around that obstacle by presenting a persuasive business plan that convinces the lender the business will succeed in the future.
Balance Sheet
A final critical component of a business lender's analysis on a business loan application is the applicant's balance sheet. This paints a financial picture of the business by revealing the existing assets, liabilities and net worth of the business. The business lender is not likely to grant a business loan if the business is already up to its neck in debt and has little or no assets to support that debt. Additionally, a business that otherwise might not qualify for a loan may be able to qualify if it can pledge before then or other business assets as collateral on the loan. This means the lender can repossess that equipment or other property if the business is unable to make the debt payments.
