SBA LENDING
What a Bank Reads Before It Lends to Your Business
A lender does not decide whether to lend to your business by meeting you. It decides by reading a file. Everything you say in the meeting is either confirmed by that file or contradicted by it, and the file wins.
So it is worth knowing what goes into the file, and what each piece is being used to answer.
The two questions everything else serves
Underneath the document list sit two questions. Does this business exist in a way we can verify? Can it repay this debt out of money it already produces? Every item below is evidence for one of those.
Owners tend to prepare for a third question, which is whether the idea is any good. That one is mostly settled by the first two.
Time in business
A lender wants operating history because history is the only thing that can be tested. The date on your incorporation filing is a start, but what actually gets read is the date the business began doing what it does now: first revenue, first payroll, first invoices.
Requirements vary widely by lender and by product, so do not carry a threshold you read online into a conversation with a specific bank. Ask that bank what it requires for the product you want. What is consistent is this: a short history means the lender has less to test, and it compensates by asking for more elsewhere, usually collateral or a larger contribution from you.
Revenue, and whether it repeats
Total revenue is the number owners lead with. On its own it is close to the least useful number in the file.
What a lender reads is the shape of the revenue:
- Consistency. Twelve steady months read very differently from two enormous months and ten quiet ones, even at the same annual total.
- Direction. Rising, flat or falling, and whether the last few months agree with the trailing year.
- Concentration. Revenue that arrives mostly from one customer is one phone call away from a different business.
- Seasonality. Predictable seasonality is normal and fine. Unexplained seasonality reads as instability.
Bring an explanation for every anomaly before anybody asks for one. A bad month with a reason is a fact. A bad month with no reason is a risk.
Coverage: whether the cash services the debt
This is the calculation that decides most files, and it has a name in every lending shop: debt service coverage.
Take the cash the business has available for debt payments across a year, after it pays its operating expenses and after the adjustments the lender is willing to accept. Divide that by the total annual payments on all debt, including the loan being requested. The result is the coverage ratio.
Illustrative arithmetic, not a lender standard: suppose a business has one hundred twenty thousand dollars a year available after it operates, and the proposed payments across all of its debt come to eighty thousand a year. Coverage is one and a half. Now suppose the available cash falls to seventy thousand. The same eighty thousand of payments no longer fits, and the file shows a shortfall instead of a cushion.
Each lender sets the coverage it requires and defines the adjustments it will accept, so ask both questions directly. How do you calculate the cash available? What coverage do you need for this transaction? Then run the calculation yourself against a slower year, before the lender runs it on your behalf.
The business bank statements
Usually several months of them, read line by line. The lender is checking whether the deposits match the revenue you claimed, what the average daily balance looks like, how many days the account sits near zero, whether there are returned items or overdrafts, and whether there are loan payments leaving the account that never appeared on your debt schedule.
That last one ends more applications than any other single item. An advance or a short term loan you did not disclose is visible in the statements within minutes of somebody opening them. Disclose it first, in writing, with the balance and the payment.
The entity file: EIN, operating agreement, address
This part is unglamorous, and it is where a surprising number of applications stall.
- The EIN. Issued by the IRS, matching the legal name exactly as filed with the state. A mismatch between the EIN letter, the state registration and the bank account is a delay every single time.
- The operating agreement or the bylaws. This is what tells a lender who owns the business, in what percentages, and who holds authority to sign a loan on its behalf. A company with no operating agreement is asking a lender to take signing authority on faith.
- Good standing with the state. An administratively dissolved entity cannot borrow. Check it before you apply rather than after.
- A business address. A real operating address the business can be reached at, consistent across the registration, the bank account, the tax returns and the application.
- Licences and insurance. Whatever your activity requires, current and issued in the business name.
None of this makes a lender want to lend. All of it can stop one.
Tax returns
Business returns, usually for two or three years, plus the personal returns of the owners who will sign. Interim statements cover the stretch since the last filed return.
Those returns get read against the financial statements you supplied. Where the two disagree, you explain the difference. Aggressive deductions are a legitimate tax strategy, and they also lower the income a lender is able to count, which is a trade many owners make without ever noticing they made it. If your last return was built to show as little profit as possible, the file you are handing a lender describes a business that barely earns.
Personal credit sits in the file as well, because the owners who sign are part of the obligation. That is a fact about how lending works, not a separate project.
The thing that makes a profitable business unlendable
Here is the failure that has nothing to do with how much money you make.
If the business runs its money through a personal account, or through an account shared with another company, there is no business to underwrite. Revenue cannot be separated from a spouse's salary or a transfer out of savings. Expenses cannot be separated from groceries. Deposits cannot be tied to invoices. The tax return describes an entity whose money never touched a business account.
The lender is not being difficult about this. It cannot perform the coverage calculation at all, because no clean series of numbers exists to perform it on. A business earning very well through a personal account is less lendable than a smaller business with two years of clean business statements behind it.
The repair takes time, which is exactly why it is worth starting long before you need the money:
- Open a business account in the legal name, using the EIN.
- Run every dollar of revenue into it and every business expense out of it.
- Pay yourself by a regular documented transfer instead of using the account personally.
- Let it run long enough to produce the statement history a lender wants to read.
There is no way to accelerate that history. There is only the choice of when you start it.
What to fix first
In order: separate the money, correct the entity records, reconcile the statements against the returns, then build the coverage calculation and test it on a bad quarter. The application comes after that, and it moves considerably faster when it does.
PRBE Capital works with owners at this stage, reading the file the way a lender will read it and naming what is missing before anything is submitted. The first conversation costs nothing and promises no approval.
This is an explanation of how business lending is underwritten, not legal, tax or financial advice. Your own accountant and attorney should review your particular situation.
Common questions
What do banks look at when approving a business loan?
Whether the business can be verified and whether it can repay the debt out of money it already produces. In practice that means time in business, revenue consistency, debt service coverage, business bank statements, tax returns and the entity records.
What is debt service coverage?
The cash a business has available for debt payments over a year, divided by the total annual payments on all of its debt including the loan being requested. Each lender sets the coverage it requires and defines the adjustments it will accept.
Can I get a business loan if I run everything through my personal account?
It is very difficult, regardless of how much you earn. Without a business account a lender cannot separate business income from personal money, so it cannot perform the coverage calculation at all. Open a business account in the legal name and let it build a statement history.
How many months of business bank statements do lenders want?
It varies by lender and by product, and they are read line by line. The lender is checking deposits against your stated revenue, average balances, days near zero, returned items, and any loan payments you did not disclose.
Do I need an operating agreement to get a business loan?
For an LLC, expect to produce one. It is the document that tells a lender who owns the business, in what percentages, and who holds authority to sign a loan on its behalf.
Do low tax returns hurt a business loan application?
They can. Deductions that reduce taxable income also reduce the income a lender is able to count, so a return built to show as little profit as possible describes a business that barely earns.
The PRBE Capital Soldiers community
The owners doing this work meet in the Skool community, in English and in Spanish. It is where the questions that do not fit in an article get asked, and where real situations get looked at without anyone's private data being put on a screen.