A profitable business can still struggle to secure funding. At first, that can seem odd. If a company makes money, why would a lender hesitate to provide finance?
The answer sits in how business finance is assessed. Profit tells a lender what remains after expenses, but it does not show the whole financial position of a company. Lenders also need to consider cash flow, debt, trading history, assets, turnover and the reason behind the funding request.
Profit is one measure within a much wider assessment of business loan criteria.
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Profit is only one part of the assessment
Profitability tells you that a business earns more than it spends over a given period. It does not necessarily tell you whether the company has enough cash available to meet a repayment every month.
A business may report a healthy profit while waiting 60 or 90 days for customers to settle invoices. It may also have substantial monthly commitments for stock, salaries, rent, equipment, tax or existing finance. On paper, the company can look profitable. In day-to-day trading, cash can still be under pressure.
The reverse can also happen. A business may have a temporary dip in profit while it invests in stock, takes on new staff or expands into another market. Its financial records may still show healthy turnover, reliable customer payments and a sensible plan for funding.
That is why business loan criteria tend to extend beyond a single figure.
Profitable businesses still need funding
A business does not need to be struggling before it needs finance.
Business funding can support an established company that has secured a large order and needs cash to fulfil it. It can help a business purchase stock ahead of a busy period, cover a gap between issuing invoices and receiving payment, acquire equipment or take advantage of an opportunity that requires capital upfront.
Even companies with healthy profits can have periods where cash is tied up elsewhere. Growth itself can create pressure on working capital. More sales can mean more stock, larger supplier bills, additional staff and longer payment cycles.
The question for a lender is therefore not simply whether the business makes a profit. It is whether the business has the financial foundations to support the proposed funding and whether the requested finance has a sensible purpose.
The business funding criteria lenders may consider
Every lender has its own approach, but several areas commonly feature in an assessment.
Cash flow
Cash flow gives insight into the money moving through the business. A lender needs to consider whether enough cash enters the company to support regular repayments after other financial commitments have been covered.
A profitable company with unpredictable cash flow may therefore receive a different assessment from a business with consistent incoming payments.
Turnover
Turnover indicates the revenue generated by the company over a given period. It helps establish the scale of the business and provides context for the funding being requested.
A lender may consider whether the requested amount is proportionate to the company’s revenue and financial activity.
Trading history
How long a company has been operating can provide useful context. A longer trading history gives a lender access to a broader record of financial performance.
Newer businesses may have fewer historical accounts or trading records available for assessment. Their applications may therefore be assessed using other available information.
Margins
Revenue alone does not indicate how much a business retains after its costs have been paid. Profit margins provide insight into how effectively revenue translates into profit.
A company with high turnover and thin margins may have less room within its finances to absorb additional repayments.
Existing debt
Existing loans, credit facilities and other financial commitments all affect affordability. A lender will need to consider how another repayment would sit alongside the company’s current obligations.
A profitable company can still face funding constraints if its existing commitments place pressure on available cash.
Assets
Assets may be relevant when considering secured finance. Property, equipment or other eligible assets can potentially provide security for certain types of funding.
The type, value and ownership of an asset can influence how it is considered within an application.
Purpose of the funding
The reason for borrowing also matters within an assessment. Finance for stock, working capital, equipment, expansion or another business requirement can have different implications for the company’s finances.
A lender needs to understand what the funds are intended to achieve and how the proposed borrowing fits within the company’s financial position.
Financial records
Accounts, bank statements and other financial documents give lenders evidence to support an application. Accurate and well-organised records can make it easier to assess the company’s position.
Incomplete records can make an application harder to assess because the lender has less information available when considering affordability and risk.
Banks are no longer the only route to business finance
For years, a bank was the obvious starting point for business finance. That is no longer the only route.
Alternative lenders have developed technology-led processes that can make business finance applications faster and less administrative. Online applications can collect information without requiring extensive paperwork at the outset. Automated systems can process financial data at speed. Artificial intelligence can also assist with analysing information within an application, although lending decisions still depend on the lender’s own assessment process.
Technology also affects how lenders look at risk.
A traditional process may place considerable emphasis on a defined set of documents and established lending requirements. Alternative lenders can assess applications through different models and may consider a wider range of business information.
That does not mean there are no rules.
Every responsible lender needs evidence that a business can support the proposed finance. The criteria may differ from those applied by a bank, but cash flow, revenue, trading history, debt and financial records still provide valuable evidence.
The practical benefit for a business owner is that a bank’s lending framework is not the only framework available.
We’d Like to Get to Know Your Business
No two businesses look identical on paper, and lending criteria that suit one company can rule out another that is every bit as sound. Geddes doesn’t apply a fixed checklist to every application. We look at the wider circumstances behind each business and consider what makes a borrower a strong candidate even when the figures don’t tick every conventional box.
If you are unsure where your business stands against typical business loan criteria, get in touch with our team. We would like the chance to understand your business properly and talk through what funding could look like for you.