What lenders are looking for in a business loan

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This lesson I'd like to talk about what lenders look for in the first place. And it's important for you to understand across the various variety of funding sources that are available to you whether you're raising debt or equity, that lenders and investors think about loan or equity opportunities in different ways. And what I mean by that is one category looks backwards, the other looks forwards. And the biggest distinction is is lenders are historical looking, they're more curious about what you have done, not what you say you're going to do. And that's why lenders when we get to some of the categories on financial ratios, that's why lenders are looking for financial documents for you, from you. They use those to take a look at what you have been able to do, not what you say you're going to do.

This is another reason it's tough for your startups to get vit what we call venture debt or loans, because startups don't have any historical precedence, any historical sales numbers typically, so it's hard to get alone. So remember, lenders look backwards, of course, investors, they're futuristic looking, I talked about that in some of my other courses, they look at what you say you're going to do. There's also different documentation that you use when you meet with lenders versus investors because of this approach, again, because investors are futuristic looking, they may be looking at sales projections, not sales that have already occurred. So you really need to understand when you meet with the lender, they're going to be looking backwards. If you meet with them and start talking about things that you say you're going to do or what your business plan says you're going to accomplish. They'll certainly listen to those things and make sure you've done your research but they really want to know what have you accomplished.

That's another reason they look at your personal experience so heavily. lenders are really looking to get paid back. investors make their money when you sell your company and they cash out the shares that they have in your business, but lenders want to get paid back and the way they do that is they get they are on their profit through interest. That's why they have a loan, right? They're charging you interest every month on that loan. And that's how They get paid back in the first place.

But the problem is, is they only get paid back. If you pay them back. If you're making enough money to make the payment on the loan. That's how they get paid back. And therefore, that is why they're so historical looking in the first place, you need to understand that this isn't a grant. It's not free money.

It's not equity when you're meeting with a lender. Lots of people call me they'll want to know what grants are available. And certainly there are some opportunities out there, but you need to understand that traditional business loans, including SBA loans are not free money, you're going to have to make that payment, your business is going to have to make that payment. Lenders just want to get paid back. And so the thing to understand with getting paid back is lenders look at what we call sources of repayment. there's typically a primary source of repayment, a secondary source of repayment, they may even go so far as to consider what we would call a tertiary source of repayment which will be the third source of repayment.

There's three main sources of repayment that they can sit We're going to be calculating some of these. That's your debt service. This makes up the largest part of the decision whether a lender is going to give you a loan in the first place. And debt service is basically cash flow that you have available to make a loan payment. Again, remember we talked about, you're going to hear it consistently, that they're historical looking, they're gonna look at the money you've made and see if at that level you can afford the loan you have. There's a saying we have out there that the worst time to go for a loan is when you need it, right.

So if you're in trouble financially, and you need a loan, you can't prove that you have the debt service. Therefore, there is no primary source of repayment. And debt service is almost always the primary source of repayment. The another main source of repayment is collateral, a lender will take a lien against your collateral if you don't make your payments. The primary source. If you don't make your payments, they have a secondary source of repayment to fall back on which is collateral, they'll just take that property away from you either through foreclosure on a house or seize your equipment, and then sell it and recoup some of their funds.

Now Notice I said some usually in that instance, if they've gone to their secondary source of repayment, they're probably not going to recoup all the funds they lent to you, they're going to have what they would call a charge off, they're going to lose money on you, which will make it really difficult to get another business loan not just with them, but with other people, because this is reported to credit. So secondary sources of repayment things like collateral. Another main source of repayment would be your personal guarantee. We're going to go further to this in another lesson, but know that you as an individual will most likely be responsible for that loan. And if the business doesn't make enough money doesn't have enough debt service to pay for the loan, and there is no collateral to liquidate or the lender liquidates the collateral and that still leaves a balance they will most likely come after you personally and you need to be prepared for that.

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