How Banks Review Business Loan Applications

two people reviewing an application

Cash flow, financial statements, and your business and personal credit histories - these are the biggest factors that go into the bank’s decision to approve your loan application.

To some small business owners, the loan review process is a big mystery. You fill out the application for a small business loan and submit all other forms and information requested by the bank — and then you wait.

If you’re wondering which factors go into the bank’s decision about whether or not to approve your loan application, then this article is for you. According to Cadence Bank Vice President and Small Business Relationship Manager Salomon Saucedo, banks look at three main things when analyzing a small business loan request:

1. Cash flow

“Cash is king,” the old saying goes. When it comes to making a decision about whether or not to lend money to a small business, this couldn’t be more true.

According to Saucedo, cash flow is the best indicator of a company’s ability to service debt. “If it doesn’t have strong cash flow, a business may not be able to make timely loan payments without disrupting its finances,” he says. “Therefore, the bank is going to perform a cash flow analysis as part of the small business loan application review.”

As part of this cash flow analysis, your bank will usually examine several different financial ratios, including the following:

Debt service coverage ratio — This ratio will reveal how much cash flow is available to pay your company’s current expenses. Saucedo says banks usually want to see a debt service coverage ratio of at least 1.5. In other words, if your business has $100,000 in principal and interest (debt service), it should have $150,000 in earnings before interest, taxes, depreciation and amortization (EBITDA). The formula:

EBITDA / Total debt service

Current ratio — This ratio will provide insight into your company’s short-term liquidity by revealing how many times current assets could be used to pay down current debt. A current ratio of 1.5 is generally considered healthy. The formula:

Current assets / Current liabilities

Debt-to-equity ratio — This ratio will help your bank determine your debt capacity. In other words, it will tell your banker how much additional debt (if any) your business can assume. A debt-to-equity ratio of 3-to-1 or lower is generally considered healthy. The formula:

Total debt / Tangible net worth

2. Financial statements

The data for gauging the strength of your company’s cash flow and computing these ratios resides within your company’s financial statements. Saucedo says the most important financial statements to a banker analyzing a small business loan request are the:

  • Balance sheet
  • Profit and loss statement (or P&L)
  • Accounts receivable aging report

“I’m sometimes surprised at the number of small business owners who don’t have professionally prepared financial statements when they approach the bank about a loan,” says Saucedo. “These are typically the most important component of a small business loan application, so it’s smart to invest the time and resources required to prepare accurate and up-to-date financial statements.”

Statements should be prepared by a qualified bookkeeper or CPA and presented in a professional format, Saucedo adds. “Ideally, they should be updated monthly, or quarterly at a minimum,” he says. “The bank will also usually request business and personal tax returns from the owner for the past two years.”

3. Business & personal credit histories

One of the best indications of a business’s willingness to repay a small business loan is how well the business and the business owner have handled debt in the past. Therefore, banks will usually examine both the business and personal credit histories of small business borrowers.

“Many small business owners don’t realize what an important role their personal credit history plays in their efforts to obtain a business loan,” says Saucedo. “So we urge owners to monitor their personal credit closely before they apply for a small business loan and to strive to boost their personal credit score. For example, they should always pay all their bills on time and not carry too many personal credit cards.”

In many instances, banks will require a small business owner to pledge a personal guarantee and collateral (including the owner’s personal residence) for a small business loan. Such a pledge commits the owner to repaying the loan out of his or per personal funds if the business is unable to repay the debt. “This adds even more importance to maintaining a strong personal credit history before applying for a small business loan,” says Saucedo.

Cadence Bank: Your small business bank

There’s really nothing mysterious about the small business loan application and review process. “The bank’s goal is simply to try to determine if your business will be capable of making principal and interest payments to service the debt,” says Saucedo. “The bank doesn’t want to loan money if the loan is going to cause undue financial stress and strain on a business.”

Cadence Bank can help you achieve your small business goals. Request more information about our small business banking products and services.


This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.

dot image