There are a variety of financing options available for businesses, and each lender has their own criteria for determining whether or not to give you credit, and by how much. Usually, when you don’t qualify for the loan you applied for, you begin wondering what the lender identified in your profile that made them decline your request.
To begin with, most banks will evaluate your loan request based on the 5C’s of credit. This includes credit history, capacity, capital, collateral, and condition. While these factors weigh on the decision making, your business bank account is also another area the bank will take a keen interest in, especially if you are looking for a line of credit or term loan.
It is important you are aware of what information the lender is looking for when analyzing your business bank account. Here are a few items banks may consider in your business banking records to determine if you are eligible for financing.
Maintaining a positive cash flow
The majority of business owners think banks are only concerned about their bottom line. However, nothing could be further from the truth. Lenders are more interested in seeing your business bringing in enough money compared to your operating costs. In particular, their focus is on your average daily balance, or the amount remaining in your business account at the close of business. The balance should not fall below the minimum operating balance required by most business bank accounts. Anything below that balance will not only attract fees but can also indicate to the bank your business is not financially stable.
One way you can maintain your business bank account balance is by utilizing credit cards. Make payments through a business credit card while you build your cash reserves in the account. In the end, you can pay off the card with a new reserve you have built just before the payment is due, thus improving your credit rating. Banks often take business credit ratings into consideration when evaluating credit applications, which means those with high credit ratings stand a higher chance to qualify for financing.
Your ability to settle more than your current debts
Apart from maintaining a positive cash flow, managing your business debts is one of the biggest indicators of a financially healthy business.
Most banks and finance companies usually measure the available cash flow your business possesses to meet your present debt obligations, sometimes referred to as debt service coverage ratios (DSCR). Finance providers are interested in seeing a debt service coverage ratio that is high, for instance, let’s say you take out a loan of Ksh. 10,000. If the DSCR is set at 1.25 the lender wants to see Ksh. 12,500 in available cash flow to qualify for financing. Should your DSCR fall below 1, that means your business is not generating money to cover its debt, and lenders may not be willing to offer you a line of credit.
Also, if you have secured financing from another bank, they will have certain rights to your business assets in case you default. Should you approach another bank for financing, they may decline your request as they do not have the primary rights to your business assets if things go sour.
A business credit card can be an exception to this rule as they are an unsecured form of credit, though that depends on your credit provider.
Your annual revenues
You may come across lenders who will want to know your monthly or yearly sales totals. They use that information to determine your eligibility, and how much credit you can comfortably pay. Most banks have their own benchmarks when it comes to annual revenues.
Therefore, if you apply for a bank loan and you meet their qualification criteria, they may be willing to lend you between 10-20% of your annual revenues. For example, if you make Ksh. 200,000 in annual sales, at 15% the bank will be willing to lend you Ksh. 30,000.
Your customer base
In addition to your total revenue banks will also want to know where your revenue is coming from. Lenders consider it a good sign of a healthy business if your revenue is derived from a broad customer base. That way should you lose a customer or two, you can still make enough money to cover your debt payments.
On the other hand, if your revenue consists of only one or two customers, that raises red flags. Banks will be very cautious when it comes to financing your business because of the risk of you losing a vital customer, and the financial consequences it will have on your business.
For instance, you bring in Ksh. 200,000 in revenue but Ksh. 80,000 is from a single customer. Your bank will discount the impact of the single customer, and determine your capacity to take on financing without the customer. This means your annual revenue will be Ksh. 120,000, thus the amount they would be willing to lend you at 15% (annual revenue range) can be more or less like Ksh. 18,000. This is a significant shortfall compared to Ksh. 30,000 you could gain from a diversified customer base.
Though it’s a key determinant when it comes to financing, your business bank account records is another cog in the decision-making wheel when it comes financing. You can start monitoring your individual and business credit ratings before you approach a bank for a cash infusion. Knowing the key factors in your banking records coupled with your credit ratings will help you solve your business financing needs.
