What banks look for when lending to a business

Approaching a bank for a financial assistance or investment can make an applicant feel like they are back at school and have been summoned to the head teacher’s office. 

The main cause of the fear is the uncertainty of the criteria. Like revising for an exam that you aren’t entirely sure of the subject, if you knew what they were looking for then you would be able to enhance those strengths and improve your chances of getting the funding you require. 

Pure financial data is a part of the calculation of course but it’s not everything. It took Amazon, the biggest retailer in the world, six years before it made a penny of profit but financing was never a problem. Why?  Because Jeff Bezos understood that lending relies on the 5 C’s

These are:

  • Character
  • Capacity
  • Capital
  • Conditions
  • Collateral

Character

The prime intangible. Trust, confidence, even the way you walk into a room and shake hands help form the impression of character that can enhance or undo the rest of the financial information you have put together in your application. 

Experience, a track record, industry knowledge and business history will help. Ultimately the bank has to decide on whether they think you are a good risk personally to lend to. A good personal credit history and references can help here especially if you are a start-up. 

Capacity

Most simply, the ability to repay the loan out of your cash flow. The bank will look at the assets and liabilities and amount of spare cash and calculate the ratio. If it is too high they may not lend because they ultimately want their money back. 

Capital

Do you have any skin in the game or are you playing entirely with house money? If you have invested money in your own business then you have something to lose if the worst happens. They will be seen to fight more because they have already sacrificed to get to this position. If the bank is putting up 100% of the money, then where is the risk for the borrower?

Conditions

Are you planning to open an ice cream stall at the North Pole or a tanning salon in the Sahara desert?  What is the outlook for the market your business is in? Where is the industry going and what might happen in the wider world and economy?  The bank has to consider these factors before lending. Some great ideas have gone unfinanced because they were in the right place at the wrong time. 

Collateral

Your word is your most valuable bond but do you have anything more concrete or valuable that could be leveraged against the deal? Do you own your home or any other assets? 

This is a backstop for the bank as collateral may never be enough to pay off the original loan if something bad happens but it could be very useful in helping to convince the bank to forward the funding in the first place. 

A solid business plan, idea and positive financial factors will help any application for lending but knowing a little more about the other intangibles will help you turn a no to a yes and help you own your way to achieving your own business dream.