Commercial lending decisions look opaque from outside and follow a reasonably standard analytical framework, which is worth understanding before applying.
The traditional framework
Lenders assess character, capacity, capital, collateral and conditions, in various formulations of the same underlying questions.
Character means the borrower's track record and credibility, assessed through credit history, previous conduct and how the business is run.
Capacity means whether the cash flow can service the debt.
Capital means what the owners have invested, since a borrower with nothing at risk behaves differently.
Collateral means what secures the loan if things go wrong.
Conditions means the economic and sector environment.
Serviceability
The central calculation.
Lenders assess whether operating cash flow covers debt service with a margin, generally expressed as a coverage ratio.
Which means the question is not whether the business is profitable but whether it generates cash reliably enough to make payments.
Stress testing at higher rates is standard, meaning the assessment uses a rate above the one offered.
What lenders actually look at in accounts
Trends rather than single years, since one good year proves little.
Consistency between accounts and bank statements, since discrepancies raise immediate questions.
Directors' drawings, which affect available cash flow and can be adjusted.
Related party transactions, which are scrutinised because they can move profit.
And whether the accounts are filed on time, which is a character signal costing nothing to get right.
Security
A fixed charge attaches to specific assets. A floating charge attaches to a class of assets that changes, crystallising on default.
Personal guarantees from directors are standard for smaller borrowing and are negotiable in scope more often than borrowers attempt.
Property security produces the best terms, which is why businesses with property borrow more cheaply than those without regardless of trading performance.
Covenants
Ongoing conditions the borrower must meet.
Financial covenants specify ratios that must be maintained — coverage, gearing, net worth.
Breaching one is a default event even if payments are current, which gives the lender rights to renegotiate or demand repayment.
Which means covenant headroom matters as much as the rate, and it is negotiated less often because borrowers focus on price.
Government-backed schemes
Many countries operate guarantee schemes where the state underwrites part of a loan to businesses that lack security.
Which addresses the collateral gap specifically, and the lender still assesses serviceability normally.
Terms, eligibility and availability change, and they are generally accessed through participating lenders rather than directly.
Preparing an application
Filed accounts current and clean.
A cash flow forecast with stated assumptions, since a forecast without assumptions is not assessable.
A clear statement of what the money is for and how it generates the cash to repay it.
Management accounts if the last filed accounts are old.
And an explanation of anything unusual, offered rather than waited for, since discovered problems are treated worse than disclosed ones.
If declined
Asking for the specific reason is worth doing, since it is frequently addressable.
Referral schemes exist in some jurisdictions requiring declined applicants to be offered alternative finance providers.
And a broker with knowledge of which lenders suit which situations can be worth their fee, particularly for businesses outside the standard profile.
This describes general practice and is not advice on any specific application, which warrants an accountant's involvement.
Asset finance
A distinct category worth understanding, since it is secured on the item being purchased.
Hire purchase transfers ownership at the end of the term after all payments. Leasing does not, with the asset returned or a further payment made.
Which affects balance sheet treatment, tax relief and what happens at the end, and the differences are meaningful enough to warrant an accountant's view before choosing.
Because the asset provides security, approval is generally easier than unsecured lending for the same amount, and rates reflect that.
Alternative lenders
Non-bank lenders have taken substantial share in small business lending, with faster decisions and higher pricing.
Which suits businesses that need speed or that do not fit bank criteria, and the cost difference is real and should be compared properly.
Merchant cash advances, repaid as a percentage of card takings, are among the most expensive forms and are marketed on the repayment mechanism rather than on the cost.
Converting the total repayable into an equivalent annual rate makes the comparison possible, and it is generally not presented that way.
Refinancing
Existing borrowing can frequently be improved once a business has a longer track record, and lenders rarely offer this unprompted.
Reviewing facilities annually against the market is a habit that pays for itself.
The relationship
Lenders assess businesses they know differently from those they do not.
Which means providing regular updates, including bad news, builds credibility that matters when a facility is needed.
Businesses that only contact their lender when they need something are assessed as such.