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What Do Lenders Look For?

Past, Present, and Future Considerations

Regardless if the lender for your business is a bank, venture capitalist, or family member, investors are interested in reviewing your credentials prior to committing to the financial health of your company. The focus of this article isn't about how to organize all of your relevant personal and/or business information into an easily referenced package for such a review. We're here to discuss what "assets," both tangible and intangible, that these potential lenders are looking for in your request for funding.

When such applications are for the creation of a new home business, lenders are more likely to invest in individuals that meet the following criteria.

• Good personal credit history/rating - Your credit report includes information from banks, lenders, and retailers relating to your credit-payment history, outstanding debts, imposed liens, etc. You can be certain that potential investors will scrutinize such a record thoroughly. Never apply for funding without knowing what's on your current credit report and take care of any outstanding problems and/or errors prior to proceeding.
• Detailed business plan - The amount of time and energy that you put into this critical outline is necessary to convey to potential investors the insight and determination that you possess. Such a plan needs to include industry-specific details pertaining to such factors as your niche market, competitors, cash flow analyses, past experience, future plans, etc. Providing a projected breakdown of how the money that you're requesting will be spent will also go a long way towards securing funds.
• Experience - While it helps to have direct experience in the business that you've chosen to pursue, it's not necessarily a requirement for being granted a loan. Past jobs, volunteer work, hobbies, etc might have provided you with critical knowledge about interacting with people, handling money, multi-tasking, etc.
• Dedication - A commitment to your proposed business is evident in a variety of ways. From the depth of information that you provide in your business plan to a work-experience record that indicates long-term dedication to past jobs, lenders will be able to recognize this intangible, but no less critical, asset.
• Financial reserves/collateral of ones own - Lenders want to know that you're going to be contributing to your own business finances/resources and not merely waiting for others to supply the cash while you supply the workforce. Whether you use your own money or supplies in the initial start-up stage of your company or keep such funds and equipment earmarked for emergency use only, you're indicating that you're willing to assume a financial risk along with your investors.

For existing home businesses that are seeking funding, lenders are interested in working with those who not only meet the above-mentioned standards but the following benchmarks as well.

• Sufficient number of years in business - How one defines "sufficient" is somewhat irrelevant. What is relevant is the general growth trend of your company during those years. Has it grown consistently? Has it shown its ability to rebound after a difficult period? Has it remained flat or perhaps even experienced a decline in profits over time? The bottom line... how has your business weathered the years?
• Healthy financial business statements - This includes balance sheets, profit and loss statements, cash flow charts, tax records, etc. While it's not critical that the bottom line on such forms indicate a huge profit, it is important that there are no major areas of "weakness" such as large amounts of accounts receivable or accounts payable or missing tax records.
• Exceptional loan repayment history - While this information would potentially be revealed in your previously-mentioned credit report, whether a prior business loan or personal loans for college, automobiles, homes, etc, there's nothing quite as comforting to a potential lender as dealing with someone who has already "made good" on past loans. It's also important to be up front and include information about any outstanding loan repayment schedules with your funding application.
• Adequate working capital of ones own - Once again, a lender wants to know that you have adequate resources of your own to pump into the lifeline of your business. If your company's current liabilities exceed its assets, there's not a lot of room for error in managing the business. Many lenders would argue that acquiring a loan is not necessarily the answer to the problem.

Lenders are interested in evaluating your past financial records, current financial status, and future financial plans and projections. However, neither an unfavorable fiscal past nor a poor present condition is indicative of future failings. Sometimes a high level of experience, deep-seated dedication, and an insightful business plan are more than enough to compensate for inadequacies in other areas.

Present the best that you have to every lender that you approach. While you must be willing to admit your weaknesses, instead of focusing on such shortcomings, emphasize your strong points. Listen to any input that you receive and last, but not least, realize that you too should be evaluating your lenders as closely as they're appraising you.

Good luck finding the perfect home business opportunity!

PS - We'd like to hear from you!
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