When a business is struggling, getting funding is never easy. Banks do not just approve loans based on goodwill or promises. They follow strict evaluation processes to minimize risk and ensure they will get repaid. Understanding this process can help business owners prepare better, improve their chances, and avoid surprises.
In this blog, we will explain how banks evaluate a struggling business before approving funding and what factors influence their decision.
1. Assessing Financial Statements
Profit and loss statements
Banks first look at the company’s financial records. They analyze revenue, expenses, gross profit, net profit, and trends over time. Even if a business is struggling, banks want to see that it has the potential to generate enough cash flow to cover loan repayments.
Balance sheets
Banks examine assets, liabilities, and equity. They want to know if the business has sufficient assets that could act as collateral. A strong balance sheet improves the likelihood of loan approval.
Cash flow statements
Cash flow is critical. Banks focus on the timing of money coming in and going out. A business may show profits but have poor cash flow. Banks check whether the business can manage daily operations while repaying the loan.
2. Reviewing Debt History
Existing loans and repayment history
Banks review current debts, repayment records, and defaults if any. A history of missed payments or loan stacking can make lenders cautious.
Credit scores and ratings
Business credit scores, as well as the owner’s personal credit history, are evaluated. Poor credit history or high-risk behavior reduces the chances of approval or may result in higher interest rates.
3. Understanding the Business Model
Revenue sources
Banks want to see where the money comes from. Stable, recurring income is viewed more favorably than irregular or seasonal revenue.
Market position
They assess the industry, competition, and customer base. A struggling business in a declining market is riskier than one facing temporary challenges in a growing sector.
Operational efficiency
Banks may examine how well the business manages costs, inventory, and staffing. Inefficient operations can signal potential risk.
4. Collateral and Security
Assets as backup
Banks prefer loans that are secured. They look for property, equipment, inventory, or receivables that can act as collateral.
Unsecured loans
For businesses with fewer assets, banks may offer unsecured funding but at higher interest rates and stricter terms. The lack of collateral increases perceived risk.
5. Business Owner’s Track Record
Experience and credibility
The owner’s industry experience, previous successes, and reputation play a role. Banks assess whether the owner has the skills to navigate challenges and lead the business back to stability.
Transparency
Banks value honesty and detailed explanations about why the business is struggling and how the loan will help. Misrepresentation or incomplete information often leads to rejection.
6. Loan Purpose and Repayment Plan
Clear objectives
Banks expect a specific and practical purpose for the funding, such as paying off high-interest debt, buying essential equipment, or covering payroll temporarily.
Repayment strategy
A well-prepared repayment plan demonstrates that the business has thought through how it will manage cash flow while servicing the debt. Banks are more likely to approve loans with realistic and structured repayment schedules.
7. Risk Assessment and Decision Making
Risk scoring
Banks use internal models to assign a risk score based on financials, market conditions, collateral, and owner credibility.
Decision
Higher-risk businesses may face higher interest rates, stricter terms, or partial approvals. Low-risk businesses, even if struggling temporarily, may get favorable terms.
Monitoring
Even after approval, banks may monitor the business closely. They may request regular updates, financial statements, or covenants to ensure repayments continue smoothly.
Conclusion
When a business is struggling, securing funding requires more than just showing a need. Banks perform a thorough evaluation that includes financial statements, debt history, business model analysis, collateral assessment, and owner credibility. They also examine loan purpose and repayment plans carefully.
Understanding how banks assess risk allows business owners to prepare better, strengthen their application, and address potential red flags in advance. By being transparent, organized, and realistic, businesses can increase their chances of approval and access the funding needed to stabilize and grow.
A loan is not just money; it is a commitment. Knowing how banks evaluate it ensures that businesses take smarter, informed decisions rather than relying on hope alone.
