Businesses often want to know whether they’ll be able to borrow the funds they need. Lenders need to make loans that are eventually repaid, and they look at requests for signals that reduce their risk of not being repaid. As a business considering a loan, you’ll want to understand what signals and factors lenders tend to evaluate so you can assess your prospects of success. The level of risk that the lender is willing to accept, industry targets, and specific evaluation approaches may vary from one lender to the next, but you’ll have a good idea of where you stand when looking for funds.
What information are lenders looking for?
“Most lenders want to know if you’re likely to repay your loan, and there are several ways that lenders analyze the risks around repayment,” said Zachary Sink, small business lending product manager at Truist. “While each bank has its own process, most follow the principles of the 5 C’s.”
So how can you use the 5 C’s to improve your chances of getting a loan?
When is the right time to apply for a loan?
Given the recent fluctuations in interest rates and inflation, many owners wonder if it’s the right time to apply for a business loan. While any loan depends on the business’s needs and ability to repay, the following considerations may assist in loan timing:
- If your business needs credit, reach out to a lender to apply for a loan. A lender will walk you through the application process and help you put together required information. If your request is declined, you have the right to ask the lender for a written statement of the specific reason(s) for your denial if you ask within 60 days of being notified of the creditor's decision.
- If your business hasn’t ever opened a credit account, consider applying for a credit card. This is often the first type of credit product that a small business will open.
- If your business doesn’t need credit right away – review the 5 C’s to make sure they are in order.
a. Build a record of making payments on time. Update your cash flow planning and monthly payment reminders to include loan payment(s) and other regular obligations or put all your payments on automatic draft.
b. Address any business issues or deficits that could keep you from securing credit.
c. Build your track record of sales and profit growth to support future borrowing.
d. Continue to build the equity value of your business—a strong balance sheet and capital structure position you for future financing.
Create your business borrowing profile.
“Before going through the process of applying for loans, first think through your needs and current business standing,” Sink said. “A business borrowing profile is a snapshot of your business and your funding needs.”
Completing the profile ensures you have a clear understanding of your business’s situation, reasons for borrowing, and plans for repayment. While most lenders won’t ask for this level of detail as part of a loan application, preparing the profile will help you articulate your request clearly.
This business borrowing profile is for your informational purposes only, and the information will neither be uploaded to an application, nor will it be considered an application for credit.