Revisiting Cash Flow: Qualifying For Your Business Loan

Looking to get a business loan for your small, growing business but not sure if your business will qualify for that financing?

On the surface, underwriting a business loan is pretty simple:

The bottom line is that any bank or lender just wants to get repaid. And, that repayment usually comes from your business’s ability to generate positive cash flow over the life of the loan.

All that other stuff like collateral, time in business, debt ratios, credit reports, bank policies standards, etc. all take a back seat to cash flow when it comes to getting your business loan approved.

In fact, these other factors, while seeming to protect the bank’s or lender’s investment in your business, in my opinion, do nothing but gum up the works.

I am sure that they justify these other items to ensure their regulators, their investors, boards of directors and stockholders all feel better protected should a loan default.

But, when underwriting a business loan, the bottom line is all about getting that principal amount back with interest (the interest is their revenue – the reason they make loans in the first place).

Think about the recent housing crisis that pushed this country into the "Great Recession." We didn’t hear about the houses that were used as collateral being undervalued (it is bad now but that is after the fact). We didn’t hear that someone’s poor credit sunk this market or how debt ratios facilitated the decline.

It had everything to do with people not being able to pay – meaning not having the cash flow to make their monthly payments when interest rates ratcheted up. That was the deciding factor. Even if property values tanked while home owners cash flow remained unchanged, these mortgage holders would still be able to make their payments. Thus, it was all about cash flow.

The same is true for business loans.

I have spent years in commercial lending and I have seen banks and other lenders throw out their policies or work with businesses that they normally would not lend to simply because the business demonstrated its ability to generate outstanding cash flow.

In fact, many banks and lenders have changed their lending focus simply to follow the cash flow money.

One example is when I worked for a national bank. This bank clearly stated in its lending policy that it would not lend to mobile home parks – period.

Then, one day I got a call from an investment group that made a living (a good living) buying up old mobile home parks, revitalizing them and turning them around.

Once the bank’s credit committee saw the cash flow that this company generated, it was no longer about what the policy stated, but about making a deal that benefited the bank – to get at that cash flow.

I guess what I am trying to say here is that we are entering a new era in business lending. The housing crisis forced banks and other lenders to pull back and seek other ways to generate income. But, as this so called "not recession" continues, these lenders will have to return to lending to grow their own businesses – and that is good news for companies like yours seeking financing.

So, forget all that other stuff you hear about debt ratios and collateral and focus on your business’s cash flow.

Not only will this help you better manage your business but as I am trying to allude to here – it will be your cash flow and your cash flow alone that will ensure that your bank or lender will not only take your call but will, in the end, approve your business loan request.

Over the next few months, we are putting together a series of posts focused solely on small business cash flow and how banks and lenders use those figures to underwrite and ultimately approve business loans.