5 ways to strengthen your credit request

When your business needs to borrow money, knowing what factors lenders consider can help you improve your chances of getting the funds you seek. Studying the five factors below and preparing good documentation can help you present a strong case.

What lenders consider

1. Equity investment — Lenders want to see that you have a substantial amount of your own assets invested in the business. They will examine your business’s debt-to-worth ratio, which indicates how much you are borrowing (debt) in relation to how much you have invested (worth). Why: A high equity investment helps to show that you have a strong commitment to the business. It also helps to demonstrate that, combined with the borrowed funds, your business will be able to operate on sound financial footing. Strong equity with a manageable debt level provides financial resiliency to help your business make it through tough times.

You should provide: Current financial statements to show the value of invested assets.

2. Earnings requirements — You must be able to reasonably demonstrate the financial might to repay the intended obligation from your business operation. Payment history on existing credit relationships (personal and commercial) is considered an indicator of future payment performance, so try to pay all of your bills on time to demonstrate that you are dependable. Why: Financial obligations must be met with cash, not “on paper” profits, so healthy cash flow is key to making timely payments.

You should provide: a monthly cash flow projection covering a year after the loan is received that details when your income will become cash and when your expenses must be paid.

3. Working capital — Positive working capital is essential for your firm to meet its ongoing operational needs. It’s defined as current assets (cash or assets that can be quickly converted to cash) minus current liabilities (obligations due within one year). Why: The availability of working capital influences your company's ability to meet its trade and short-term debt obligations, as well as to remain financially viable.

You should provide: a balance sheet with information about your accounts receivable, accounts payable and inventory.

4. Collateral — Depending on the loan, lenders may want to be assured that you have a second source of loan repayment. Collateral may be assets such as equipment, real estate, accounts receivable or (in some cases) inventory. Why: If you default on the loan, the lender can recoup its money by selling the collateral for cash.

You should provide: a collateral document that describes the cost and value of assets that will be used to secure a loan.

5. Resource management — How solidly you manage the resources of your business plays a prime role in a lender’s decision. This encompasses how you pay your debts and collect on debts owed to you, deliver goods and/or services to customers and manage inventory. Why: These measures help the lender decide subjectively whether you are sufficiently dependable to repay the loan.

You should provide: Information to give the lender an overall picture of your management performance:

• Debt-to-worth ratio
• Working capital ratio
• The rate at which income is received after it is earned
• The rate at which debt is paid after becoming due
• The rate at which products and/or services move from your business to its customers

Robust lending capacity

California Bank & Trust is dedicated to building strong, long-term relationships with clients like you. Our expert business bankers can help you evaluate your financing needs and find solutions to help you get the credit your business needs.[cite::171::cite] [cite::172::cite] [cite::108::cite]