Applying for a business loan can feel intimidating. Many business owners wonder what happens after the application is submitted and why lenders ask for what seems like endless information.
The reality is this: banks aren’t trying to make borrowing difficult. We’re trying to understand your business clearly so we can make smart, responsible lending decisions—for both you and the bank.
Let’s take a look, in plain-English, at how banks evaluate business loans and how you can prepare to improve your chances of approval (and speed up the process).
The Core Question
Can this business repay the loan as agreed?
Everything we review ultimately ties back to that single question. To answer it, lenders generally focus on 5 key areas, which we refer to as the “5 Cs of Credit.”
Character: Trust and Track Record
When taking a look at character, we look into the borrower’s reliability, integrity, and history of meeting obligations. This includes the business itself, the owner(s), and the company’s management.
We consider factors like:
- Payment history on existing debts
- Personal credit history
- Transparency and communication
- Management experience
Strong character doesn’t mean a perfect history. It means consistency, honesty and accountability.
How should you prepare?
- Review credit reports before applying. You can get one free credit report per year by visiting www.annualcreditreport.com.
- Be proactive about explaining any past issues.
- Respond promptly to any questions your banker has.
Capacity: Ability to Repay
Capacity is one of the most important factors in any bank’s lending decisions. It answers one key question: Does the business generate enough cash flow to repay the loan?
Banks will analyze:
- Historical and projected cash flow
- Existing debt obligations
- How stable and predictable income is
- Ability to pay existing and proposed debt
How should you prepare?
- Have tax returns and current financial statements available
- Understand your monthly debt obligations
- Be ready to explain the numbers that you present
Capital: Skin in the Game
Capital is a measure of how much the owner has invested in the business and how committed they are.
Banks look at:
- Owner’s equity in the business
- Retained earnings
- Liquidity and net worth
Capital shows the bank that you’re invested in the business and are willing to see it through any hard times that may pop up.
How to prepare to discuss capital:
- Understand your balance sheet
- Have a plan for reinvestment in the business
Collateral: Secondary Support
Collateral provides additional protection if repayment doesn’t go as planned. While it’s not the primary reason a loan would be approved, it plays an important role in the structure of a loan.
Collateral can be a number of things—essentially any asset with a real value. Think of things like:
- Equipment or vehicles
- Real estate
- Inventory or receivables
How to prepare:
- Maintain complete records about business assets
- Know what is already pledged as collateral for other debt
Conditions: The Bigger Picture
When looking at conditions, we’re thinking of the big picture. Things like the purpose of the loan and things outside of your (and our) control.
We will consider:
- What you plan to do with the loan proceeds
- Trends and risks within your specific industry
- Economic and market conditions
Your FMS lender will work with you to determine a loan structure that aligns with your needs and will benefit everyone.
How to prepare:
- Be able to explain how you will use the loan funds, and how they will benefit your business
- Know what risks your business faces, and have a plan for reducing those risks
- Be open to structure recommendations.
Some Common Misconceptions About Loan Decisions
- A high credit score guarantees approval.
- Collateral can replace cash flow. No bank wants to take your collateral—they’d rather be repaid.
- Profit matters more than what the business does with its cash.
- Banks only look at numbers, not people
At FMS Bank, we believe that lending is more than just a transaction—it’s a relationship. As a community bank, we take the time to understand you, your business, your goals, and the stories behind the numbers.
No two loan requests are the same. That’s why our credit decisions are made locally, by people who live and work in the communities we serve. This allows us to move efficiently, ask thoughtful questions, and structure loans that make sense for you. We don’t believe that one-size-fits-all.
Whether you’re planning for growth, navigating a transition, or simply exploring your options, our lenders are here to be a resource—not just at application time, but through the relationship we build with you.
Please always feel welcome to stop in to our Fort Morgan or Greeley branches, or call anytime to be connected with a lender.
This article is for educational purposes only and does not constitute a loan commitment. All credit decisions are subject to underwriting, approval, and bank policy. The bank may consider other factors not listed here.
