What Banks Look For

"Remember, the guy who writes the bank's advertisements is not the same guy who approves your loan." --Anonymous

Whether you are applying to a bank for a line of home equity credit, a line of credit for business working capital, a commercial short-term loan, an equipment loan, real estate financing, or some other type of commercial or consumer loan, many of the same basic lending principles apply. The most fundamental characteristics a prospective lender will want to examine are:

• credit history of the borrower
• cash flow history and projections for the business
• collateral that is available to secure the loan
• character of the borrower
• loan documentation that includes business and personal financial statements, income tax returns, and frequently a business plan, and that essentially sums up and provides evidence for the first four items listed

The first three of these criteria are largely objective data (although interpretation of the numbers can be subjective). The fourth item, the borrower's character, allows the lender to make a more subjective assessment of the business's market appeal and the business savvy of its operators. In assessing whether to finance a small business, lenders are often willing to consider individual factors that represent strengths or weaknesses for a loan. Also consider our discussion of how banks judge your application.

To give you an idea of what banks specifically focus on when reviewing a loan request, the Business Tools contains a sample business loan application form that is typical of the kind of documentation you'll need to complete as part of your loan application package. We also include an internal bank loan review form used by one small community bank to make its own review of a small business loan.