Small business owners borrowed $645 billion in 2019. Are you ready to take your business to the next level but need a little extra financial assistance? A commercial loan can be the way to go. However, you shouldn’t accept just any loan. The terms need to be favorable and financially smart for your business. A commercial loan analysis can give better insight into your ability to borrow.
Find out what you can learn when you have a commercial loan analysis performed.
What Is a Commercial Loan Analysis?
A commercial loan analysis helps a creditor to know how safe of a borrower you are. The lender makes money when they lend out money, and the borrower repays that loan with interest. If the borrower defaults and doesn’t repay the loan, then the lender loses money. A commercial loan analysis is the lender’s way of determining how likely it is that you, the borrower, will repay the requested loan. There are several tools that a lender will use during its analysis, such as trend, cash flow, collateral, credit history, and leadership experience, and ratio analysis.
Let’s look at the five C’s of credit analysis to get a better picture of what a commercial loan analysis is.
Capacity
A lender will look at the business’s capacity to repay the loan. This analysis will tell you what your cash flow is like. You can better understand this analysis by taking a look at your monthly cash flow statement. It will outline how much money the business brings is and what the current expenses are. The lender will use this to determine what the business can afford as the monthly principal and interest payment.
Collateral
Business collateral is the assets the business has to back up the repayment of the loan. Sometimes, the collateral is the asset that the borrower is using the money to purchase. This is what happens when someone buys a car or house. For a business, it could be equipment purchased. Sometimes, a business can use its accounts receivable as collateral. This analysis can help you understand what assets the business has and the value of outstanding payments.
Conditions
The conditions are the circumstances surrounding the loan. This could be the conditions of the industry, economy, competition, or purpose of the loan. These factors can impact the overall business and its ability to repay the loan. This analysis can help you understand the climate and atmosphere that your business operates in. You can then take steps to insulate your business from risk.
Capital
A lender is more likely to approve a business loan when they know the owner is personally invested in the business. Capital is the amount of money that is currently invested and readily available for investment. Business borrowers with a large amount of money invested are less likely to default, making it easier to get approved. Lenders commonly use industry reports that you can also access, like IBISWORLD.
Character
Lenders want to lend to borrowers who have a history of repaying their debts. This analysis will help you understand the reputation your business has. This is more than an accounting statement or balance sheet. This analysis will help you understand the assets that you have in your employee’s experience and education. Your business is the people who are behind the branding, and their reputation is your business reputation.
Find the Right Commercial Loan
Finding the right commercial loan means finding a lender that you are willing to work with and is willing to give you a loan with favorable terms. Performing a commercial loan analysis of your business will help you better understand how attractive your business is to lenders before you attempt to borrow money. This information will help you make the appropriate moves to improve your business.
Request a consultation today and let one of our skilled attorneys help you with a commercial loan analysis.
