What Small Business Lenders Look For.

Posted By Kalamata Capital LLC || 24-Jun-2016

A General Guide to SBA Lenders Underwriting Criteria

When applying for an SBA loan, there are a number of factors creditors look for to determine your companies’ ability to payback debt.

Payment History and Cash Flow

One of the most important factors that lenders evaluate is payment history. A company must show strong cash management by paying bills, loans, and credit cards on time because lenders use your track record to make projections for future payment tendencies. Late or missed payments can lead to stricter lending terms and even denial of credit.

Financial obligations must be paid with liquid assets. Therefore, lenders will evaluate a company’s cash flow to see the timing of cash ins and cash outs. This will help lenders decide whether a company will have enough cash to make loan payments. For example, if the proposed loan is going to be paid at the end of each month, it is important to demonstrate the ability to pay all existing payments with enough of a buffer for an additional loan payment.

Current Assets Vs. Current Liabilities

Lenders also look for a company’s ability to manage its current forms of financing. A company must avoid keeping high balances on credit lines in order to show the ability to operate profitably using its own revenues.

Lenders calculate the difference between current assets and current liabilities to see how much cushion there is to acquire new debt and operate during times of unstable cash flows. Current assets are generally defined as cash and other assets that will be converted to cash within a year. Current liabilities are generally defined as debt payable to creditors within the next year. A positive difference between current assets and liabilities gives short-term creditors confidence that their debt will be repaid.

Personal Credit Score

Lenders look at the guarantors’ personal credit score as a reflection on the business itself. Creditors make sure business owners are not hurting their personal credit score by maxing out personal credit facilities to keep the business afloat.

Just to be clear, a business owners personal credit score is not directly linked to the company’s credit rating. Click the following link to learn how to build a credit profile for your business. http://www.kalamatacapital.com/Blog/2016/May/Building-a-Small-Business-Credit-Profile.aspx

Trade Lines

Establishing trade lines between a business and its vendors show strong levels of trust between business partners. Lenders look at the payment track record to make predictions for future loan payments. In return, a company can utilize trade lines to expense inventory purchases and free up cash flow.

Similarly, creating customer credit facilities shows lenders that there is a consistent consumer base. Lenders like to understand the timing of the sale to the receipt of payment. Demonstrating a consistent consumer base that makes payments on time will reflect well on the company.

Financial Capacity

Lenders will look at a company’s financial statements and bank statements to calculate key financial ratios. The statements are used to calculate leverage, liquidity, loan to value, solvency, and profitability ratios. They will also be used to calculate inventory turnover rate, accounts receivable cycle, and accounts payable cycle.

Collateral and Personal Equity

SBA programs look to secure the loan using either personal and/or business owned assets as collateral. In the event of default, the creditor can assume ownership of the asset up to the amount outstanding on the loan. The asset can then be liquidated to allow the lender to recoup some of the loss.


Each bank has its own underwriting requirements and requests different documents to complete their due diligence. This article is simply a high level overview of what most lenders check for once receiving a loan package.

If you have any questions, feel free to call Kalamata Capital at (844)-551-7511 to speak with a financing specialist today.

Categories: Small Business, Tips, Funding, SBA, Loan