These are the same credit factors a lender will review and analyze before deciding whether to internally approve your loan application, seek a guaranty from SBA to support their loan to you, or decline your application all together. This ensures that, when combined with borrowed funds, the business can operate on a sound basis. The value of invested assets should be substantiated by invoices or appraisals for start-up businesses, or current financial statements for existing businesses. Strong equity with a manageable debt level provide financial resiliency to help a firm weather periods of operational adversity. Sufficient equity is particularly important for new business.
Weak equity makes a lender more hesitant to provide any financial assistance.
Determining whether a company's level of debt is appropriate in relation to its equity requires analysis of the company's expected earnings and the viability and variability of these earnings. The stronger the support for projected profits, the greater the likelihood the loan will be approved. Applications with high debt, low equity, and unsupported projections are prime candidates for loan denial. Financial obligations are paid with cash, not profits. When cash outflow exceeds cash inflow for an extended period of time, a business cannot continue to operate.