5 Factors That Affect SME Lending Success

Many nations’ economic development depends significantly on SMEs. They increase the number of employment opportunities, introduce more products and services into the market, produce wealth for many people, and are the major forces behind the prosperity of the national economy.

Access to financing is essential for small and medium-sized businesses (SMEs) to develop and operate well. Yet, despite their acknowledged significance, most SMEs struggle to secure financing from financial institutions and have limited success with SME lending.

The largest challenge for SMEs is typically obtaining the appropriate financing at the right moment. Continue reading to learn about some factors that affect SME lending success.

1.   Reliability

Lenders and banks must be confident that the owner and the company are reliable and able to repay a loan. The main resources used to judge a company’s credibility are its business credit reports and the personal credit records of any owners.

As part of the loan decision-making process, trade references will probably be sought on a company’s credit application. Typically, a business loan application will request three trade references.

It’s crucial to check the correctness of your personal and business credit reports before requesting a business credit. Any ambiguities or out-of-date information should be clarified as soon as you can.

2.   Credit Capacity

The credit capacity is an assessment of your company’s repayment capacity for a loan or commercial line of credit. Solid income, a good financial record, additional sources, and a track record of on-time payments from other companies are the greatest ways to show your creditworthiness.

Banks, lenders, and suppliers want to know about a customer’s payment history, such as how long an account was open, how much credit has been added, and how frequently late payments have been made.

3.   Collateral

Collateral of a company includes expensive corporate assets that can be sold if a company defaults on a loan, such as industrial machinery, office equipment, stocks, etc. Another type of collateral is commercial real estate.

If a bank accepts your collateral, it will then use the asset’s characteristics to calculate its loan-to-value ratio. You should find out how your lender determines the loan-to-value ratio because every lender has a different way of doing so.

While most conventional banks require collateral to approve a business loan, some lenders do not.

4.   Subpar Business Plan

A subpar business plan is another typical element that affects SME financing. Unfortunately, many small firms apply for loans with just any lender without having a well-thought-out strategy.

Loan applications are frequently turned down because of this. The lender could ask for your company’s sales estimate, revenue projections, expansion plans, and other documents if the loan amount is sizable.

The regions in which you want to use the funds may also interest the lenders. Analyzing the risk of lending to your firm is the main reason lenders or banks do this.

5.   Invested Capital

The amount of money the business owner has invested is a criterion bankers consider when evaluating a business loan. A business loan will probably be treated more favorably if the owner has made a “fair” investment in the company.

It’s crucial to consider however much stock you have because it can mean the difference between approval and rejection.

Lenders look at the business’s debt-to-equity ratio to evaluate how much capital you are asking for compared to how much capital you have previously incorporated into your business. The ratio should be as small as possible.


Finally, you now have a good idea of the factor that influence SMEs’ lending success and keep them from obtaining affordable financing.

Building a network of banking contacts is crucial before asking for company credit. Applying for funding to a bank you currently work with is always a good idea. The difficulties mentioned above have persisted for a long time. Additionally, they must be resolved quickly to prevent future harm to small and medium-sized firms.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.