Alabama A&M University
S M A L L FA R M S R E S E A R C H C E N T E R
FA C T S H E E T
COLLEGE OF
AGRICULTURAL, LIFE
AND NATURAL SCIENCES
United States Department of Agriculture
Office of Advocacy and Outreach (OAO)
Financing Your Business - What Do Lenders Look For
"There are many different sources of funds for business start-up or expansion, but the most common source continues to be banks and other financial institutions. However, obtaining debt capital is not as difficult as it seems if you are prepared. Realize that if the lender does not know
you, his/her opinion of risk is similar to them
taking that money to a Las Vegas Casino.
Therefore, you need to consider how much
money you need, why you need it and how you
will pay it back; emphasis on “pay back.” A
loan officer looks at a number of issues when
making a decision. They help to determine your
credit-worthiness and are based on what are
generally referred to as the “5 C’s of Credit.”
Character: Your credit is the beginning point. It
helps to determine how you handle debt. Word-tothe-wise, obtain your credit report and clean it up
prior to applying for a loan.
Capital: Banks and other financing entities will rarely provide the borrower with 100 percent of the funds; they want you to invest something too as
a sign of commitment to the business venture. Consider 15-20 percent of the total projected
start-up or expansion costs.
Collateral: An asset that is taken as security and helps
to lessen the lenders risk. It can be made up of both
personal and business assets. The value of those assets should at least equal the amount of the loan request.
Small Farms Research
Center
Alabama A&M University
4900 Meridian Street
James I. Dawson Building
RM #219
P.O. Box 700
Normal, AL 35762
Cash Flow: Lenders will look at historical and projected cash flow statements to determine your
ability to repay the borrowed funds and efficiently operate the business. For start-ups and on
some occasions existing business owners, your personal income or net worth will also be considered in the lending decisions.
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Conditions: Factors that affect the potential success of the business which include such aspects as entrepreneurial
skills and experience, business and economic trends, competition, regulations, etc. Along with the “5 C’s of Credit”
other documentation will be required. Depending upon the type of business you are engaged in, its life cycle will
determine what additional information the lender will or might be looking for. Again, the key issue before requesting any type of financing from a bank or financial institution is to be prepared. Keep good production and financial
(business) records, be familiar with and clean up your credit report.
Author:Duncan M. Chembezi, Ph.D. Professor and Director, Small Farms Research Center , Alabama A&M University
Cooperating Units: USDA Office of Advocacy and Outreach (OAO), USDA/NIFA/ Beginning Farmers and Ranchers
Development Program (BFRDP), USDA/OAO/Outreach Assistance for Socially Disadvantaged Farmers and
Ranchers (OASDFR) Program, Alabama Cooperative Extension Systems, and Alabama A&M University.
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