Assessing and Improving Your Financial Health

Previously: Understanding the Bank Loan Application Process

A strong financial foundation not only helps you get approved for a loan, it also strengthens your business in the long run. In this post, you’ll learn how to assess your business’s financial health, as well as steps you can take to improve your financial profile when applying — or reapplying — for a loan.

Your Business & Personal Credit Scores

Your credit scores are some of the first things a lender will look at. The scores tell them how responsibly you’ve managed debt in the past. Low or inconsistent scores are one of the main reasons for a loan denial.

• Personal credit score – This is especially important if your business is new or you’re applying as a sole proprietor.
   
• Business credit score – If you’ve been operating for a while, your business may have its own credit profile.

Tips for Improving Your Credit Scores

• Pay down your existing debt and make sure to avoid taking on any new high-interest debt.
• Ensure you dispute any errors on your credit reports no matter how small.
• When applying for a loan, keep your credit utilization low. Try to stay under 30% of your total available credit.
• Track your credit scores regularly by using free tools or credit monitoring services.

Review Your Financial Statements

Having up-to-date and accurate financial statements are important to your business story. Lenders will use them to evaluate your performance and make projections about what type of future success you are likely to generate.

The three primary financial statements to focus on are:

• Profit & Loss (P&L) Statement
• Balance Sheet
• Cash Flow Statement

These documents help tell the story of where your money is coming from, where it’s going and how stable your business is.

Other Financial Ratios Lenders Consider

Lenders also rely on other financial ratios to dig deeper into what your statements may look like. These may include:

• Current Ratio, which measures your company’s ability to pay short-term obligations using all current assets.
• Quick Ratio, which is a more conservative measure that excludes inventory.
• Debt-to-Income (DTI), which helps evaluate how well you can manage additional debt.
• Debt Service Coverage Ratio (DSCR), which assesses your ability to pay back loans based on your cash flow.
• Loan-to-Value (LTV) statement, comparing the loan amount to the value of the property being utilized as collateral.

Tracking and organizing your financial records regularly using tools like QuickBooks, Wave or a simple spreadsheet can go a long way in keeping things lender-ready.

Understand and Manage Your Cash Flow

The importance of having positive cash flow means your business is earning more than it's spending — a green flag for lenders. Understanding where your money flows in and out each month helps you plan better and avoid deficits.

Start by identifying trends in your income and expenses and figuring out how to best manage them. By creating projections and building a budget for the year ahead, you can better anticipate challenges and show lenders that you’re forward-thinking and financially responsible.

For further assistance and additional resources on improving your financial health, reach out to The Iowa Center!

Prepare for Future Profitability

To take a proactive approach to increasing your chances of loan approval, get serious about improving your overall business health. Try things like:

• Diversifying your revenue streams to reduce reliance on a single source of income.
• Managing expenses carefully and eliminating waste.
• Exploring more growth strategies, such as new markets, products or services.
• Identifying cost-cutting measures that don’t impact the heart of your business.

Next up: Strengthening Your Business Plan