Borrowing for business? This is what lenders look for

Ability to repay

It is important that you can repay financing. That is why financiers always look at the repayment capacity of your business. They want to know whether you have enough money coming in that will allow you to pay the interest and repayments. Financiers look at cash flow. That is the money that goes in and out of your business.

You calculate repayment capacity in four steps:

1. Calculate your business's income.
2. Calculate your expenses, such as your purchasing costs, rent, staff costs, existing repayments and taxes. Note that some expenses are not actual expenses. An example is depreciation.
3. Also include your own salary or salaries (counted with income tax) as an expense.
4. Subtract expenses and remuneration from income. What remains is the free cash flow. This amount should be enough to pay your new financing expenses.

Profitability 

Financiers also assess the profitability of your business. It should be positive, preferably for several years in a row. They then look at the profitability of your business relative to turnover and equity capital. This takes into account appropriate entrepreneurial remuneration.

Solvency 

Financiers want to know how much money you put into your business yourself. In other words, your equity capital. Solvency is the ratio of your equity capital to your company's total assets. The resulting percentage indicates whether your business can pay its debts in the long term. So whether you can repay your lender's loan on time. Financiers think solvency should be between 25% and 40%.

Money you borrow from family, friends, or other informal investors can also be equity capital. This is only true if you agree in advance that you will repay these loans only after the external financier has been paid off in full. The loans are then given subordinated status. That means they are at the bottom of the list for repayment.

Balance sheet ratios

When assessing your plan, financiers also pay attention to the ratios in your budgets and balance sheet. For example, the ratio of your inventory value to total turnover.

They then look to see if you adhere to the ‘golden balance sheet rule’. The rule says that you should finance things you keep in your business for a long time with money you can use for a long time. Example: you finance buildings and machinery with a loan that you pay back over a number of years. Things in your business that you sell or use quickly, you finance with money that you also have to pay back quickly. Example: you finance your stock with a short-term loan.

Qualities of team and entrepreneur 

Most financiers will want to know how you and your team function before approving a loan application. If your team does not have all the necessary in-house expertise, you should work with external experts. Or arrange training and education. 

Collateral 

With collateral, a lender runs less risk when giving you a loan. You make the collateral available to the lender. If you can no longer pay the interest and repayment of the loan, the lender will sell the collateral. Business collateral includes, for example, business premises, inventory, machinery, stock or debtors. Every collateral has a different value to a financier.

How important collateral is varies by form of financing. In factoring and leasing, collateral is very important.

Complete loan applications 

The application must be complete. You should submit all the documents requested for your loan application, including the financial statements, investment estimate, and bank statements, all at the same time. This will speed up the process and increase your chances of obtaining the loan.

Help with business financing

The Financing Guide will help you find your way around financing options. Do you still have questions? Call the helpline on 088 585 11 11 or ask an expert for advice.