Before You Apply: Six Ways to Help Strengthen Your Business Financing Application

Every business owner who applies for financing asks the same question: what is the lender looking for?

It’s a fair question, and the honest answer is that no two applications are alike. Two businesses in the same industry, at the same stage and with similar revenue can look very different once you get into the numbers. In other words, what works for one won’t necessarily apply to the other.

That said, the thinking behind a lending decision tends to be consistent. Lenders are trying to answer a few key questions about your business, and most of them can be anticipated. Here are six ways to prepare.

1. Start the financing conversation before you need the money

One of the more common issues for businesses seeking financing is treating the bank as the last step. Often, an owner will build a plan, create the projections, decide how much they need and then bring a finished package to the bank for a verdict.

There’s a better order to do things: talk to an advisor or account manager at your bank first, ask what the requirements are and then build your plan to meet them. One advance meeting can save you months of effort.

Financing also takes longer than many owners expect – particularly for startups with no financial history behind them. A first application can take longer than expected from the first discovery meeting to final approval. So, if you have a lease to sign or equipment to order, it’s best to work backwards from that date… and give yourself some breathing room while you’re at it.

2. Know the three financial ratios lenders are looking at

Lending decisions rest heavily on three financial ratios. A ratio is simply one number from your financial statements divided by another, and each answers a specific question about your business. You can calculate all three yourself, and knowing where you stand can tell you a lot about how your application will be received.

Current Ratio (liquidity)

Shows whether your business can cover what it owes over the next 12 months with what it has coming in over the same period.

Current assets are cash and anything you can expect to turn into cash within the next year – like money in the bank, accounts receivable and inventory. Current liabilities are what you owe over the same year, including supplier payables, credit card balances, taxes owing and the next 12 months of loan payments.

At a minimum, you want to be above 1, meaning you have more than a dollar of current assets for every dollar of current debt. Many lenders like to see somewhere between 1.5 and 2. Below 1, you may not have enough to carry you through the year.

Debt to Tangible Net Worth (leverage)

Shows how much of your business is funded by lenders compared with how much is funded by you. Where the Current Ratio looks at the year ahead, this one takes a longer view of whether the business can carry its debt load over time.

Total debt is everything the business owes, over the short term and long term, such as your operating line of credit, credit cards, equipment loans, vehicle financing and any commercial mortgage or lease obligations.

Tangible net worth is your equity with the hard-to-value assets removed. Equity is everything your business owns minus everything it owes. Lenders then subtract things like goodwill, trademarks and brand value, because those are difficult to price and difficult to sell.

It’s important to know this number because it’s your cushion – it represents the money you have put in and the earnings you have left in the business, and it absorbs any losses before a lender’s money is at risk. It also tells you how much more room you have to borrow before the ratio moves outside the range lenders look for.

You want this ratio to be 3 or less. If it’s any higher, your total debt is more than three times what the business is worth.

Debt Service Coverage Ratio (cash flow)

Shows whether your business generates enough cash to make its loan payments with room to spare.

Net operating income is what’s left from your revenue after the costs of running the business, such as rent, wages, supplies and utilities, but before loan payments and taxes.

Total debt service is the full year of loan payments, both principal and interest, across every loan the business carries.

You want this ratio to be 1.25 or higher. That works out to $1.25 in earnings for every dollar of debt payments, which leaves a cushion after your loans are paid.

As every lender calculates these ratios a little differently – and expectations vary by industry – consider the above as general guidelines. The real value they give you is in knowing your position before you apply, and being ready to explain your numbers if needed.

3. Talk to your accountant about your financing plans

When you’re a business owner, taxes are always top of mind – and accountants are often measured by how much tax they save you. But if you end up paying less tax because you report less income on your tax return, you may not be set up for longer-term success. After all, a company that shows less income demonstrates less capacity to service debt.

Taking money out of the company aggressively works the same way. If you earned $100,000 in profit and took $200,000 in dividends, that $100,000 deficit comes off your equity position, which affects your leverage.

So if you’re planning to buy equipment, take on a second location or apply for your biggest loan to date, your accountant should know about it – you want your tax decisions to align with your financing needs.

4. Support your financial projections with research

Projections play a key role in every financing application, but they carry the most weight when you don’t have a track record to show. For a new business, there are no financial statements to point to, so your projections are all that the lender has to work with. For an established business asking to fund something it hasn’t done before – like a second location or a major equipment purchase – your projections need to demonstrate what the investment is intended to accomplish.

Two questions determine whether a lender can act on them. Is this reasonable? And can you achieve it?

Answering them means working backwards from the numbers to the evidence behind them. You will want to be prepared with backup, such as:

• Your experience in the industry: Years spent in this field demonstrate you know what your numbers should look like

• Industry data and market reports: Typical margins in your sector or local demographic data show your assumptions are grounded in evidence

• Actual numbers from your suppliers: Real quotes from suppliers, contractors and your landlord put your costs on solid ground

• Proof of demand: A waitlist, pre-sales, deposits, signed clients or an established following all show that customers are ready before you start bringing in revenue

5. Know what you’ll need to bring to a financing application

Beyond the ratios, most financing conversations come down to a few concrete requirements: money you’re putting in yourself, security or a personal guarantee, and enough working capital to cover your fixed costs through a slow stretch. For a new business, that means the months before you begin earning revenue. For an established one, that could mean bridging the gap between money going out and money coming back in.

This is where early conversations with a financial partner can help – having a clear line of sight into these expectations can give you time to close any gaps.

And if you’re short in either security or working capital? There are usually options worth exploring:

• Consider a smaller ask to start. You may not need the full amount today, and a smaller facility now can be revisited down the road once the business has a track record

• Look at a longer amortization. Spreading payments over more years lowers your annual debt service and improves your coverage

• Think about who else might support you. A silent shareholder with personal assets can strengthen your working capital position and give the lender additional comfort, without taking an active role in your business

• Ask whether a guarantor is an option. Someone who believes in the business and has the assets to back it up can bridge a gap in security

• Push your timeline. Waiting a few months to build up more of your own equity may help put your application in a stronger position

6. Identify your weaknesses up front – and how you’ll address them

There’s no such thing as a perfect application. Every business has a soft spot somewhere, and lenders see that every day. They’re not expecting a flawless file.

That’s why it’s important to know what that less-than-ideal part of your application is, and how to explain it. Try looking at your business the way an outsider would: if you were reading this for the first time, what would concern you?

It also helps to understand that your advisor is one part of the process. They work with you directly and then present the application internally for a second review. That’s why the reasoning behind your numbers is so important, as they need to explain your business to someone who has never met you.

Keep in mind too that a “no” is rarely the end of a conversation. Often the request needs adjusting – whether it’s a smaller amount, a different structure or a bit more equity. If you’re turned down, ask why and find out what would change the answer.

Case study: How PAKT got to yes

When Chris Lewarne and Karina Vee were seeking financing for PAKT, a Toronto fitness studio they co-founded, they came to the conversation well prepared. They had a detailed business plan, a clear vision for their model and an eager community that had formed before their doors had even opened. As a startup, however, they faced lending challenges: no financial statements – only projections – and neither founder owned residential property they could use to secure a personal guarantee. An earlier application to another bank had been declined.

Then the application landed on the desk of RBC Senior Relationship Manager David Kim. He could see where the application was light but could also see that the business plan had a great deal of work behind it. So instead of sending it back, he started asking questions. “We didn’t simply return the application based on the information we had,” he says. “We focused on how we could partner with the client to deliver value, and dug deeper to understand their vision, validate their projections and assess fallback plans.”

He brought in RBC Relationship Manager Julie Kim, whose background in accounting and financial analysis provided critical insight. Together, they invited PAKT’s CFO to refine the financial projections. The group then spent three months on the financial projections before turning to any other part of the application.

“Most business owners are very optimistic at the start,” David Kim says. “They’re proud of their product or service, and they should be. But they often haven’t researched their competitors closely enough, and that’s where the projections stop reflecting the reality of the market.”

The team worked through the numbers line by line – from projected sales revenue and operating expenses to net income, while also looking closely at operational details: who the customer is, how the business reaches them and whether demand is seasonal. They also worked to translate what made PAKT distinctive into figures a credit team could assess.

“When we first met the founders, we could feel their passion,” Julie Kim says. “They already had a loyal following before they even opened their doors, which proved their idea resonated far beyond their spreadsheet. We asked them to share everything with us so we could turn their vision into financial terms together and identify exactly what was missing.”

What was missing came down to working capital and security. A small shareholder was brought in to strengthen the company’s cash position, and documentation and financial structure were addressed one piece at a time. From the first discovery meeting to final approval, the process took eight months.

“Transparency was our cornerstone,” Julie Kim says. “The client openly shared what was in place and we identified gaps together. In turn, we gave clear updates on where things stood and a realistic timeline at every step, so the clients always knew what to expect next. That open dialogue kept the process on track, and it reinforced trust.”