Capital providers—whether banks, alternative lenders, or private equity—are evaluating risk. The better prepared your business is, the faster you'll secure capital and the more favorable your terms will be. Preparation isn't just about having clean financials; it's about demonstrating operational discipline, cash flow predictability, and a clear path to repayment or value creation.

Financial Clarity: The Foundation

Lenders cannot underwrite what they cannot understand. If your financials are disorganized, inconsistent, or incomplete, you'll struggle to secure capital—regardless of how strong your business actually is.

What Lenders Expect:

• 3 years of financial statements: P&L, balance sheet, and cash flow statements
• Year-to-date financials: Current performance compared to prior year
• Tax returns: Business and personal tax returns for the past 3 years
• AR/AP aging reports: Understanding working capital cycles
• Bank statements: Proof of cash flow and liquidity

If your books are managed in spreadsheets, now is the time to transition to accounting software (QuickBooks, Xero, etc.). If your accountant hasn't prepared reviewed or audited statements, consider upgrading to a CPA who can provide lender-ready financials.

Cash Flow Consistency

Lenders care about one thing above all else: can you service the debt? This means demonstrating consistent, predictable cash flow over multiple years.

Red Flags for Lenders:

• Declining revenue or EBITDA
• Inconsistent month-to-month cash flow (unless seasonal and explainable)
• Negative working capital or frequent cash crunches
• Heavy reliance on owner equity injections to cover operations

If your business has lumpy cash flow, be prepared to explain seasonality, customer payment terms, or project-based revenue cycles. Lenders can work with these dynamics if they're understood and managed.

Documentation Readiness

Beyond financials, lenders will request operational and legal documentation to assess business health and structure.

Common Documentation Requirements:

• Business plan or growth plan: Clear articulation of how capital will be deployed
• Customer contracts: Evidence of recurring revenue or pipeline
• Lease agreements: For real estate or equipment
• Vendor relationships: Key supplier terms and dependencies
• Employee roster: Organizational structure and key personnel
• Debt schedule: Existing loans, payment terms, and maturity dates
• Corporate structure: LLC, S-Corp, C-Corp formation documents

Having these documents organized and ready accelerates the underwriting process and signals professionalism to lenders.

Clean Up Personal Finances

For small business lending (especially SBA loans), your personal financial profile matters. Lenders will review personal credit scores, personal tax returns, and personal liquidity. If you have delinquent debts, low credit scores, or insufficient personal reserves, address these issues before approaching lenders. A credit score below 680 will disqualify you from most SBA loans, and personal financial instability raises red flags about your ability to manage business finances.

Understand Your Debt Service Coverage Ratio (DSCR)

DSCR is the metric lenders use to determine whether your business generates enough cash flow to cover debt payments. It's calculated as:

Most lenders require a DSCR of 1.25x or higher, meaning your business must generate $1.25 in cash flow for every $1.00 in debt payments.

If your DSCR is below 1.25x, you either need to improve profitability, reduce debt requests, or find alternative capital structures (equity, mezzanine debt, etc.).

Why Preparation Matters Before Capital Conversations

Too many business owners approach capital providers reactively—when they're desperate, underprepared, or facing a cash crunch. This puts you in a weak negotiating position and often results in unfavorable terms or outright rejection. The best time to secure capital is when you don't desperately need it. Prepare your business for capital access long before you require it, and you'll have leverage, optionality, and better terms when opportunities arise.

Final Checklist Before Approaching Lenders

• 3 years of clean, lender-ready financials
• Clear use of proceeds and repayment plan
• Organized documentation (legal, operational, financial)
• Personal credit score 680+
• DSCR of 1.25x or higher
• Realistic capital request based on cash flow and collateral

If you can check these boxes, you're in a strong position to secure capital on favorable terms.