Small Business Loan Credit Factors
A Home Business Article Contributed by Cassandra l. Keller
Small Business Loan Credit Factors
Before you decide to apply for a small business loan, there are some credit factors you should take the time to know and understand. These factors apply to all loan requests and they are the same factors a lender will look at when considering the loan application.
Equity Investment for a Small Business Loan
If you plan on applying for a small business loan, you will need to have a considerable amount invested into your business already. An owner can invest assets and/or cash into the business to qualify this factor. The loan application examiner will review the debt-to-worth ratio of the applicant to determine how much the lender is being asked to lend in relation to what the owner has invested.
A business with a strong equity and manageable debt will be able to weather hard times. Business without this type of equity are considered a lending risk because it may not be able to pay back its debt.
Earning Requirements for a Small Business Loan
If a company's cash outflow is larger than its inflow for a long period of time, the business cannot continue to operate. It is for this reason that cash management is vital to the businesses success. For cash to support a company's operation, it must come at the right time and in the correct amount. This is where the comany's earning requirements come in to play. The buisness has to bring in enough cash to pay not only its loan payments, but the rest of its debts as well.
To review this small business loan factor, applicants are usually asked to report when their income will evolve into cash flow.
Evaluating a Company's Working Capital
Working capital is the excess of current assets over current liabilities. Usually current assets are the most liquid of all the assets. Current liabilities are obligations due within the year.
Working capital represents the cushion of protection a business can give its short term creditors.
It is also key in allowing the company to meet its operation needs. Its adequacy allows the lender determine the businesses financial viability.
Collateral for a Small Business Loan
In general, a small business loan lender will require some worthwhile assets to be available as collateral.
Collateral can be assets usable in the company and personal assets of the owner that do not relate to the business.
Evaluating Resource Management of the Small Business
Lastly, a small business lender will consider the ability of the owner to manage the resources of their business. This factor, also called the "character" is the main consideration when guaranteeing a loan. The resource management history of the business owner will also be taken into review.
Overall, a series of mathematical calculations and projected financial statements will provide the deciding insight into how these resources have been manage in the past. There is not a single ratio, however, that provides all of this information and insight. Instead, numerous rations are used in conjunction with each other to provide an overall review of management performance.
