Lending institutions and investors are powerful sources of financing that start-ups and existing businesses could use to secure business upgrading capital. 

However, some businesses fail to meet certain strict criteria, including critical assessments lending institutions put on the ability of the business to repay the loan. 

Pointing an eye on how the loan will benefit the business for them to get repaid, they want to be convinced that they are in a promising business. They also want to justify to themselves that the money they commit to an entrepreneur’s business will produce anticipated maximum returns.

Before I delve into the nitty gritty of the requirements, let me share the basic difference between lending institutions and investors’ understanding of money they lend to or invest into entrepreneurs’ businesses. 

Lenders agree to loan money to businesses with the understanding that it will be repaid over a set term, with fixed interest as the cost of borrowing. They do not acquire a share of the business profits. However, they are heedful about the business’s ability to repay the loan, as that’s one way they can lose money if the business defaults on its loan payment.

On the other hand, investors agree to inject capital into the business in exchange for a specific percentage share. If the business thrives, they profit from the success. Yet, if the business struggles, they are not owed anything. That means they share risks with the business, unlike with lending institutions. 

Further to this, with investors, therefore, due diligence must be performed prudently to ensure investments are fruitful. Consequently, they only invest in a solid business based on detailed and realistic cash-flow projections. Therefore, businesses have to embrace the utmost obligation to ensure information and practical business cases are presented to convince lenders and investors beyond reasonable doubt on how they will generate revenue, and be profitable. 

That said, the following are some of the critical requirements influencing lenders and investors’ decisions to offer loans or invest in a business:

Credit history

Why is it significant for an entrepreneur to show credit antiquity? A credit history is one of the requirements lenders demand to decide on whether to lend the money or not. It is partly from considering how reliable the business has been when it comes to making payments on time in the past. Entrepreneurs should be in a position to provide such reports of the past credit records to lenders to demonstrate that their business will not be a bad risk. In the case of a new business, personal financial statements will be useful for reaching such a decision. The report should show utilisation of previous loans and the repayment records. Failure to pay or overdue payment records are not a positive indicator of creditworthiness. Therefore, it is imperative that entrepreneurs embrace a culture of paying bills on time and avoiding defaulting on accounts, among others. These records are highly influential on lenders’ decisions to approve business capital needs.

Collateral 

Why is it essential to consider? This is to ensure that lenders have a means to recover their investment in the event of default. It is just an asset that can either be property pledged by a business (entrepreneur) to protect the interests of the lender, for example, real estate (immovable property owned by the business) or other liquidity assets like personal insurance policies, savings accounts, etc. Therefore, the assets entrepreneurs will be willing to offer as a guarantee for the loan they are seeking will demonstrate their commitment to the business, and this will influence the decision positively, removing the fear and uncertainties on the part of the lenders, hence positioning businesses to secure a loan or investment injection.

Repayment plan

This helps to demonstrate how the business proposes to pay back the loan and the applicable interest. A lending institution would be interested to know that the business will be able to pay back the loan plus the interest thereon. It wants to see that the asset acquired with the help of the loan will have a life longer than the repayment period and that it will generate sufficient revenue to repay the loan. 

As a result, the business plan formulation should be able to project detailed cash -low and income and expense statements, as this will illustrate the business’s capacity to repay the loan.

Furthermore, investors who show interest and would want to invest in the business would be interested in learning more about the objectives and goals of the business enterprise, and its potential to make profit. 

Therefore, entrepreneurs must work out an appropriate financial plan showing the distribution to investors under a predetermined arrangement. Well-articulated objectives and goals should be presented on the business plan to entice investors and whet their investment appetite.

Target market 

Businesses should clearly state the target market for their product and be in a position to show that their products or services are in high demand. For existing businesses, they should provide evidence of past sales against sales forecasts, accounts receivable statistics, receipts of purchase orders, or anything related to sales. For a new business enterprise, I know this could be a challenge.owever, positive responses of customers in the target market obtained through market research (questionnaires and surveys) will be useful information.

Marketing plan

A proper marketing plan can also influence lenders and investors’ decision-making positively. The emphasis here is to show in the business plan that there is a targeted market that will be effectively served by the business. 

This is an indicator, for the lenders and investors, of a good prospect of the business and provides confidence in them. 

The marketing plan should show the trend and the market or demand sizes in the coming years. 

Short-term loans for business capital need a repayment period of about five years. Therefore, it is essential to have a marketing plan ranging from five to 10 years.

There are plenty of aspects lending institutions take into consideration. 

However, for the purpose of this article, the few discussed above are seen as best in enhancing people’s basic understanding of lending requirements.

*Andreas Iilonga Filippus.