A lender reading your loan application is trying to answer one question: will this person pay us back?
Everything they ask for is a way of answering it. Once you understand that, preparing a strong application gets much easier, because you stop guessing what they want.
The five things every lender judges
Bankers call these the five Cs of credit.
| What they look at | The question behind it | How you show it |
|---|---|---|
| Character | Do you pay what you owe? | Your personal credit history and your track record |
| Capacity | Will the business earn enough to make the payments? | A realistic financial forecast |
| Capital | Have you put your own money in? | Your own investment in the business |
| Collateral | What secures the loan if things go wrong? | Equipment, property or a personal guarantee |
| Conditions | Is this a sensible business in a sensible market? | Your business plan and your reason for borrowing |
A new business has no history, so lenders lean harder on you personally: your credit, your experience in the industry and how much of your own money is at risk.
The package to prepare
Have these ready before your first meeting. Walking in organized is itself a signal.
- A business plan that explains what you sell, who buys it, who you compete with and why you will win.
- A financial forecast, usually three years, with the first year month by month. Show the assumptions behind every number.
- A use-of-funds list. Exactly what the loan pays for, line by line.
- A break-even calculation. How much you need to sell to cover your costs and the loan payment.
- Personal financial information. Tax returns, a list of what you own and owe.
- Your experience. A short summary of why you are the right person to run this business.
- Business paperwork. Registration, licenses, lease or letter of intent, and any signed customer commitments.
Why startups get turned down
- The forecast is a hockey stick. Sales that triple every year with no explanation. Lenders have seen thousands of these and believe none of them.
- No cushion. A plan that only works if everything goes right. Show what happens if sales come in 25% lower.
- Asking for the wrong amount. Too little and you run out before the business is on its feet. Too much and you cannot explain what it is for.
- The owner has nothing in. If you will not risk your own money, why should they?
- The owner does not know the numbers. If someone else wrote the plan and you cannot explain it, the meeting ends there.
A plan you can explain beats a plan that looks impressive
The strongest applications are not the longest ones. They are the ones where the owner can sit across the table and walk through every assumption without looking at the page. Build the forecast yourself, or with someone who makes you understand each line.
Before you apply
Talk to more than one lender, including a community bank or credit union, and ask your accountant and attorney to review any loan terms before you sign. This article is general information, not financial or legal advice.
Our Startup Launchpad produces the plan, the three-year model and the lender package, and makes sure you can explain all of it.