What Do Banks Look for in a Business Loan? A Lender's Checklist

Banks look at five things when you apply for a business loan: cash flow, the quality of your financial statements, how much debt you already have, your business and personal credit, and collateral. Cash flow matters most. It answers the only question a lender really cares about: how does this loan get paid back?

Here's how a commercial lender looks at each one.

1. Cash flow: can the business afford the payments?

Banks measure this with the debt service coverage ratio (DSCR): yearly cash flow divided by yearly loan payments, including the new loan.

• What they want: at least 1.25 at most regional banks. That's $1.25 of cash for every $1.00 of payments.
• What hurts: large owner distributions, one-time profits, and cash flow that jumps up and down from year to year.

Calculate your DSCR in under a minute.

2. Financial statements: can they trust the numbers?

Bankers read your statements for trends and consistency, not one great year.

• What they want: three years of statements and tax returns, a current interim statement, steady margins, and tax returns that match your statements.
• What hurts: stale numbers, unexplained swings, receivables growing much faster than sales, and loans from the company to the owner.

3. Existing debt: is there room for more?

Banks compare what you owe to what the business is worth with the debt-to-equity ratio.

• What they want: 2.0 or lower for most industries. 3.0 is usually acceptable.
• What hurts: above 4.0, or any debt with daily or weekly payments, like a merchant cash advance.

4. Credit: how have you handled debt before?

Banks pull credit on the business and on every owner of 20% or more.

• What they want: personal scores above 700, a business Paydex of 80 or higher, and credit card and line balances under 30% of the limit.
• What hurts: late payments, maxed-out lines, and a business credit file with no history.

5. Collateral: what's the backup plan?

Collateral is what the bank can sell if the loan isn't repaid. Banks lend a percentage of each asset's value, called the advance rate.

Collateral	Typical advance rate
Cash and CDs	90 to 100%
Receivables under 90 days	70 to 80%
Inventory	20 to 50%
New equipment	70 to 80% of cost
Owner-occupied real estate	75 to 85%

The documents to have ready

• Three years of business tax returns and financial statements
• A current interim statement (60 to 90 days old or newer)
• A debt schedule listing every loan, balance, payment, rate, and maturity
• Accounts receivable and accounts payable agings
• A personal financial statement and tax returns for each owner of 20% or more
• Entity documents: operating agreement or bylaws, good standing, EIN
• Deal documents: equipment quotes, purchase agreements, or bids

A complete, current package is the biggest thing you control. It speeds up approval and often gets you better pricing. Chapter 8 walks through the full process, from application to funding.

Common questions

What is the most important thing banks look at for a business loan?

Cash flow. Banks want to see that your business makes enough cash to cover all its loan payments with room to spare. Most measure this with the debt service coverage ratio (DSCR) and want at least 1.25.

How many years of financial statements do banks want?

Usually three years of business financial statements and tax returns, plus a current interim statement no more than 60 to 90 days old.

Do I need collateral for a business loan?

Most bank loans are secured by collateral, such as receivables, inventory, equipment, or real estate. SBA 7(a) loans can help when collateral is light. Cash flow gets you approved; collateral mostly affects your rate and terms.

What credit score do I need for a business loan?

Banks don't publish one cutoff, but owners with personal credit scores above 700 and a business Paydex score of 80 or higher are in a strong position. Banks review the credit of every owner who holds 20% or more of the company.