How lenders make loan decisions

Karen Appelgren//May 23, 2018

How lenders make loan decisions

Karen Appelgren//May 23, 2018

Karen Appelgren

At some point in the lifespan of your business, you may need to approach a bank for financing. Perhaps your goals include funding startup costs or growth plans, refinancing existing debt, or acquiring real estate, equipment or even another business.

In my role as director of the Zions Bank Business Resource Center, I work with aspiring entrepreneurs and established business owners daily. My clients often ask me how business loan decisions are made. Generally speaking, a bank’s analysis will include five areas of focus, often referred to as “The Five C’s of Credit.” These include character, capacity, capital, collateral and conditions.



Character refers to the owner’s industry experience and personal credit history, including a demonstrated willingness and ability to repay debts. When it comes to credit scores, keep in mind there is no “magic” number, although banks generally look favorably on FICO scores of 700 or above. It’s typically a good idea to pull your own free credit report at ftc.gov before applying for a loan to check for errors or dispute or explain items needing attention. You can expect the bank to review a credit report for anyone with 20 percent or more ownership in the company, because these are the individuals who will be required to personally guarantee the loan.

Capacity is the business’s ability to generate positive cash flow and profit to cover business operations, including any debt service requirement. You will be asked to provide documents to show the company’s historical and current financial situation. Requested documents include business tax returns and financial statements (balance sheets and profit and loss/income statements) for the past three years, as well as interims. Lenders will also want to see a business debt schedule listing details about existing obligations. Financial projections, or estimates of future revenues and expenses, may be required if you are applying for an SBA loan or if you anticipate significant changes in your business model going forward.

Capital is the owner’s cash or equity contribution to the business. This is often referred to as “skin in the game.” The amount of capital required varies depending on the loan type. For example, the SBA 7(a) loan is typically a 20 percent down payment of the total project cost. Your capital injection can be combined with other sources to meet the requirement, such as gifts from family or friends, money from investors, or “seller carry” situations when buying a business.

Collateral refers to tangible assets pledged to secure the loan amount. Keep in mind that some lenders will value the collateral (equipment, inventory, vehicles, furniture and fixtures) at “liquidation value” — what the items could be sold for on the open market, rather than actual purchase price. Real estate collateral will be valued from a property appraisal requested by the bank. If there is not enough business collateral to secure the loan, the bank may ask the business owners to pledge personal assets, such as stocks or equity in a home or vehicle.

Conditions describe the current and forecasted economic climate for the industry and overall economy in which the business operates. Some industries are considered riskier than others because businesses in those sectors have had higher failure rates with bank loans. If your business falls into this category, be prepared for greater scrutiny. It is a good idea to do some industry research to find sources describing the challenges and opportunities facing businesses such as yours. Be prepared to articulate your strategy to take advantage of positive trends or to mitigate anticipated issues.

If you’re seeking a business loan, find out what information the lender needs from you to submit a complete loan package for a decision. Be timely and truthful in responding to any questions. Finally, have conversations about timelines with your lender to set realistic expectations about when the loan would likely close and fund, if approved.

Karen Appelgren is vice president and director of the Zions Bank Business Resource Center in Boise. To contact Karen, call (208) 501-7449 or email [email protected]