The person signing for the loan is taking all the risk; they will be the one the bank comes after if the loan goes bad. This person MUST be the most sound financial person on your team: high credit score; solid PFS; and, preferably, experience doing that which you are seeking the loan from the lender. Certainly, there are instances where experience is less important because many businesses have a “money partner” who does not have experience in that business. But, all partners must realize, the person signing for the loan is taking all the risk should the loan go unpaid.
Lenders are very interested in your Personal Financial Statement (PFS); it makes up approximately 60% of the loan equation. This enables lenders to see your whole financial landscape. They are critical of you having too much debt and not enough liquid assets, or salary, to pay the loan back. Think of it simply… if you cannot pay the loan back, the bank wants to be able to collect or “attach” something of yours so they can convert it into cash and pay off the loan.
Your business is also very important, making up about 30% of the equation. Lenders want to make sure you have a thriving business with proper cash flow and the ability to pay its expenses and debts. The longer you have been in business, the more favorable the lender will look at your loan. Again, this rationale is simple, they want to loan money to people who have been doing something for a long time and making a profit doing it.
If you are a new business with no financial history, the road is tougher, but not insurmountable. Naturally, loans from friends and/or relatives are an easier and, sometimes, more beneficial route for funding a new business. As far as banks go, you must tell a story and back it up with realistic projections and some kind of “collateral.” Collateral is just a fancy word for something the banks can attach or sell if your loan is unpaid. This is a business and no one wants to have an unpaid loan.
A high credit score is only about 5% of the equation. It shows a past history of responsible financial behavior. It is not, however, wholly determinative of your ability to pay back a loan. A person may have a high credit score because they have never had any debt. This is why lenders use a credit score, but do not place an extraordinary amount of emphasis upon it.
The kind of business you are in or going into makes up another 5% of the equation. Each lender is different and each lender makes their own determination as to the types of business they wish to loan money. A lender's criteria for choosing loans can, and does, change over time as the economy and lending landscape changes.
If you are starting a business from scratch lenders will, most likely, want more “skin in the game;” this simply means, they will require you to put more cash into the business. This makes sense, because new businesses are much riskier than ones that have a track record.
As you can see, there are many factors that go into obtaining a loan and each lender is different. Most of all, this is not personal. It is a game of avoiding, or minimizing, risk for the lending institution. These lenders want performing loans and successful businesses, but you, and your team, will need to make that happen.