Borrowing for business? This is what lenders look for

When you apply for a loan, you can boost your chances of success if you know what criteria financiers use. What are some of the important issues to consider when completing a loan application, how can you manage this process, and what other funding options are available?

Compare your situation against 6 assessment criteria applied by financiers and find out what you can do if you do not score well in a particular area.

1. Collateral 

Financiers are less at risk when providing loans if you use a business collateral. You will then make this collateral available to the financier. If you can no longer make the interest payments, the financier will sell the collateral. Examples of business collaterals include business premises, inventory, machines, stocks, or accounts receivable. Every collateral has a different value to a financier. The value of your business premises, for example, accounts as collateral for 70%. For your inventory, this accounts for 35% of the value.

The value of all your collaterals combined determines how much you can borrow. The higher the value of the collateral or collaterals put up against the loan, the lower the risk for the financier and the higher the amount you are able to borrow. If the financier’s risk is lower, so is the interest rate.  

Forced sale of collateral 

The value assigned to a collateral by financiers is lower than the value you assign to it as a business owner. This is because, for collaterals, the proceeds of the sale from a forced sale are lower than those from a voluntary sale. Financiers cannot wait for the most favourable price if they are looking to sell their product stock quickly. 

2. Profitability 

The profitability of your business is a criterion for determining how much profit you will generate. You must compare your profit with the average total invested capital; this comparison will also show whether your business will be able to survive. Financiers generally believe a profitability rate of between 5% and 10% is reasonable. You can improve profitability if you change the cost price, expenses, and selling price. 

3. Solvency 

Solvency (in Dutch) refers to the relationship of your private equity and your business’s total capital. The resulting percentage indicates whether your business can pay off its long-term debts. Financiers will generally believe the solvency rate should be between 25% and 40%. If this is not the case, you will improve your solvency through, for example, accounts receivable management, stock optimisation, or reduced dividends. 

4. Liquidity 

Your liquidity tells you whether you can pay your bills in the immediate future and is an indication for the viability of your business. You can calculate your liquidity through a number of key figures. Your cash flow also forms part of your liquidity. This is the balance of income and expenditures during a specific period. If your cash flow is negative, you can improve it by managing accounts receivable, accounts payable, and stock.

5. 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. FinTech financiers are less likely to consider this as a factor. 

6. Comprehensive loan applications 

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. 

Loan application with sufficient points 

Do you score positive on all the criteria? Then you stand a good chance of getting funding from banks and non-bank financiers. Financiers give their own points and priority to the criteria. Ask a financier about this in advance. Then you will know better whether a credit application makes sense.

What to do when your score is low?

You may have a too low score on some points. For example, if you do not have much in the way of collateral, FinTech financiers will demand less collateral for financing. 

Is your profitability, solvency, or liquidity low? Then you can make money by selling shares in your bv to family or friends. Or to a business angel or another business investor. Do you have a sole proprietorship or general partnership (vof)? Then you can alternatively borrow money from family or friends.

If your solvency is lower, you can take your loan application to FinTech financiers. Alternatively, you can sell shares if you run a bv/private limited company. Friends and family members, business angels, and other business investors (in Dutch) can buy shares in your business. If you own an eenmanszaak (sole proprietorship) or vof (general partnership), you can request a loan or credit from family or friends by way of alternative. 

Tip: Do you want to arrange part of your loan through family and friends? Then do this before you make another funding application. Because then it is clear that others also have confidence in you.

Selecting a form of financing

Before submitting a loan application, you can use the funding flowchart to find a type of financing that suits your situation. 

Enlisting the support of others increases your chances when submitting a loan application. And with the right advisor and a good financial rationale, you will increase your chances of obtaining financing. These advisers will help you get started. 

Video: Financing your business

Watch the Financing your business video. It explains how you can find money for your business, and the steps you need to take.