When planning business development, a company’s own funds are not always sufficient to realise its plans, so entrepreneurs consider securing external financing. Support can come from business partners, family or friends, but most often companies turn to a bank. However, not all loan applications are approved. Luminor Head of Small and Medium Enterprise Banking Uģis Počs explains which criteria the bank evaluates and how a company can prepare to increase its chances of receiving funding.
Credit history and reputation
When reviewing a funding application, the bank carefully assesses the company's credit history and payment discipline. Receiving funding can be hindered by previously missed payments, tax debts and other unfulfilled obligations for which information is available in the relevant registers. The payment discipline of company owners and board members is also evaluated, as it can affect the company’s overall credibility. It is important to maintain timely fulfilment of obligations and a positive credit history consistently – this not only increases the chances of receiving funding, but also strengthens the company’s reputation in the eyes of cooperation partners.
Financial stability of the company
To make a decision on granting a loan, the bank verifies the company’s financial stability and its ability to take on additional liabilities. A key indicator is the free cash flow after covering daily expenses, which must be sufficient to repay the loan. The bank also assesses the company’s equity and the owners' willingness to invest their own funds into the project, thereby demonstrating their involvement and confidence in the viability of the plan. No less important are the company’s liquidity and its ability to absorb cost increases or revenue declines, while maintaining sufficient financial resources for the company’s operations and development.
If the company’s equity or the collateral offered is insufficient to receive funding, the bank may request additional collateral. In such cases, entrepreneurs in Latvia can also use ALTUM support in the form of loan guarantees, which facilitates access to funding.
Scale of existing liabilities
Likewise, when assessing a loan, the bank takes into account the company’s existing financial liabilities and their ratio to current and projected cash flow. The burden of liabilities must be proportionate to the company’s ability to cover both existing and planned payments. Such an evaluation is performed during the review process of every loan application, so it is important for a company to carefully assess the necessity and impact of each new loan on its overall financial burden before applying. For the bank, this provides an understanding not only of the company’s financial situation but also of the management’s financial literacy.
Lack of a clear loan utilisation plan
Alongside the company’s financial situation, the bank also evaluates the purpose of the financing and the plan for its use. If the application does not clearly justify the purpose of the transaction, the expected economic benefit or the market potential, the bank may request additional information or refuse funding, as there is insufficient justification for granting it.