How Fundable is Your Business?

If more than 50% of your revenue comes from just a few customers, your business has a high customer concentration risk. Lenders prefer businesses with diversified revenue streams as they are less likely to fail if one customer leaves. Lower concentration improves your fundability.

Even resolved litigation can impact the business’s reputation and indicate operational or governance issues. Banks look for businesses with minimal risk exposure, and a history of unresolved or repeated legal issues can make traditional financing more difficult to obtain. It’s not just the presence of past litigation but also the frequency, nature, and outcomes that can influence a lender’s decision.

Cash flow refers to the net amount of money being transferred into and out of a business. Positive cash flow means the business is bringing in more revenue than it's spending on expenses, while negative cash flow indicates that the business is spending more than it earns, making it difficult to cover expenses or loan payments. Positive cash flow happens when: Sales revenue is consistent or growing. Expenses are controlled, and debts are managed well. The business collects payments from customers in a timely manner. Negative cash flow occurs when: Sales are low or inconsistent. High expenses, such as overhead, payroll, or debt payments, outpace incoming revenue. There are delays in collecting receivables, leading to cash shortages. Why Cash Flow Matters: Lenders rely on positive, predictable cash flow as a key indicator that a business can repay loans. Inconsistent or negative cash flow increases risk, signaling that a business might struggle with loan repayments.

Lenders need clean, organized financial records to assess the financial health of your business. If your records are incomplete or unorganized, it may prevent you from securing funding.

Businesses with less than 20% seasonal revenue are more stable and generally more attractive to lenders. For those between 20-50%, managing cash flow effectively during off-seasons is key. If more than 50% of your revenue is seasonal, it can raise concerns about cash flow consistency, but effective management during peak periods can still mitigate risk for lenders.

Lenders prefer businesses with at least a few years of stable operations, as this indicates long-term viability. Newer businesses, while fundable, may need to present stronger cases for stability.

Collateral reduces the risk for lenders, as they can seize assets if the loan is not repaid. Without sufficient collateral, securing a loan becomes more difficult.

A lower debt-to-income ratio means you have more income relative to your debt. Lenders prefer lower ratios as they indicate the business is not over-leveraged and has the capacity to take on new debt. A debt-to-income (DTI) ratio compares your business's total monthly debt payments to its gross monthly income. It shows how much of your income is being used to pay debts. To calculate it, divide your total monthly debt payments by your gross monthly income. A lower DTI is better, as it indicates your business has more income to cover its debts and can take on additional loans if needed. Lenders typically prefer a DTI ratio below 1x (i.e., debt is less than income).

A diverse client base means that losing one client won't cripple your business. A business that relies too heavily on a few clients is at higher risk and less appealing to lenders.

Unresolved tax issues are a major red flag for lenders. Unpaid taxes can lead to liens or penalties that could hinder loan repayment.