Banks Have Guardrails They Follow When Making Lending Decisions

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Cash Contribution

Working with expert business plan writers can help prepare you for bank meetings. It takes a lot of money to start any business, and banks typically want you to invest everything you have before they’re willing to get involved. Like buying a car or a house, a minimum 10%-20% down payment will be expected. Unfortunately, most startups don’t have sufficient cash and so a bank will explore options to secure the loan against some tangible assets, whether retirement accounts, or other physical goods with value that are owned outright.

Collateralization

Obtaining a business loan tends to be more challenging than getting a home mortgage. With a home purchase, the bank secures the loan against the home’s tangible, market value. The house becomes the underlying, pledged asset that will be forfeited in the event of a default. Having collateral is one of the most efficient ways to secure a small business loan.

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For retail-oriented businesses considering construction or renovation of a retail front, banks can only collateralize the dirt the building sits on. Further, business owners considering leasing a site, none of those assets can be collateralized, making it extremely hard for owners to obtain funding unless there are clear lines of securable assets. Limited collateral makes it even more important to work with an experienced group of business plan writers to properly layout the nature of your business, its expected cash flows, and general ability to service debt obligations. 

Credit History

An applicant’s credit history helps or hurts the credit application. Generally banks want to see a score of at least 680 in order to issue credit. For those with subpar credit scores, there are many ways to restore credit to health. Poor credit will likely prevent an owner from obtaining the loan required to start her business. However, working with our business plan writers can help connect your business with unconventional lenders who base credit decisions on other adjacent factors. 

Owner Skillset

Banks carefully assess the qualitative factors of any potential loan arrangement. While the financial aspects, like expected cash flows, net income, debt-to-income, are critical, banks also deep dive the management team to better understand its capabilities, experience, and strengths. 

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Relevant experience is an important underwriting factor. Banks tend to challenge a business plan when the owner has zero experience or knowledge of the industry in which the business competes. Other factors like education, career progression, and scope of responsibilities can help offset any concerns a bank might have. Professional business plan writers can forge a cohesive document that helps mitigate any potential underwriting concerns. 

Proof of Concept

In some cases, innovating in existing industries or entering new white spaces tends to produce attractive financial results. However, banks are by nature overly-conservative. When a business plan showcases an unproven concept, banks will have limited case studies to review. 

Working with experienced business plan consultants can help you overcome some of these potential challenges. A quantitative business plan, based on deep market research and sound financial projections, can position your business to secure the required funding.