Types of Traditional Lending
Traditional lending provides borrowers with loans from banks, credit unions, and other financial institutions. These loans are typically best suited for established companies with a strong credit history that require larger amounts of capital (roughly more than $250,000) but can also assist small enterprises in need of capital. When considering whether to assist a borrower, lenders will often consider factors such as the borrower’s credit, the debt service coverage ratio from the primary source of cash flows, the age of the business, the borrower’s current debt amount, the loan-to-value ratio of the collateral, the type of business, and the business plan.
In addition, U.S. Small Business Administration (SBA) loans can help small businesses that may not qualify for banking loans by offering lower down payments and no collateral for certain loans (under $50,000). SBA loans typically have higher interest rates, and most are variable rate loans subject to changes in future interest rates.
According to the SBA, licensed small business investment companies (SBICs) are eligible for low-cost, government-backed capital that can be used to boost private investments in small businesses and startups. There is also asset-based lending, which allows borrowers to put up non-monetary assets such as receivables and inventory as collateral for a loan. Businesses can also obtain lines of credit, which allow them to spend a certain amount and only pay interest on the amount spent.
Advantages of Traditional Lending
Traditional banking offers benefits that borrowers may not find through alternatives. Banks may offer fixed interest rates that won’t change based on future interest rates. Traditional loans also typically offer lower rates than other sources. Repayment schedules are predictable, which helps businesses with financial planning.
Businesses with a long-term relationship with a bank are more likely to qualify for loans or lines of credit since the institution is familiar with their history and risk profile. Banks may look at whether an applicant already banks with them and what their activity and average balances look like. Some banks may also add promotional rates if applicants have enough funds and activity that can reduce loan expenses and interest rates.
Challenges & Limitations
While a traditional loan may be a business’s best avenue for lending, there are potential drawbacks to consider. Some businesses may struggle to qualify for loans due to banks’ stricter criteria. The process for bank loans tends to have longer approval times, with borrowers having to submit a variety of documents. Access to assistance could be limited to certain bank hours. Those seeking SBA loans may face requests for more paperwork and collateral. Businesses must be clear about how they will use the loan and may need extra approval if they deviate from it.
How We Can Help
Forvis Mazars offers an in-depth suite of audit, review, compilation, and tax services that can support borrowers seeking loans from banks, credit unions, or other financial institutions. When applying for a loan, lenders often require reliable financial statements to assess creditworthiness. Forvis Mazars can help prepare these through audits, reviews, or compilations, each tailored to the level of assurance needed. Audits provide the highest level of assurance, offering an independent examination of financial records, while reviews and compilations offer streamlined alternatives for less complex needs. These services help borrowers present accurate, credible financial information that aligns with lender expectations, increasing the likelihood of loan approval. Beyond the initial application, Forvis Mazars plays a vital role in helping borrowers meet ongoing covenant requirements. Financial institutions frequently monitor borrowers’ financial health post-loan through periodic reviews of tax returns, financial statements, and compliance metrics.
Our extensive experience in tax compliance and advisory helps borrowers not only meet regulatory obligations but also enhance their financial strategies. Loan review consultants from Forvis Mazars can go beyond surface-level analysis to detect potential risks early, helping borrowers stay ahead of covenant breaches and maintain strong relationships with lenders. Our valuation team can assist with the valuation of collateral, including both tangible and intangible assets. With deep sector knowledge and a collaborative approach, Forvis Mazars helps empower borrowers to navigate the full life cycle of their financing with confidence.
Forvis Mazars also provides a robust set of services that can be instrumental for borrowers navigating the loan application process and ongoing financial covenant requirements. In addition to audit, review, compilation, and tax services, our outsourced accounting and CFO advisory offerings help provide strategic financial leadership and operational support.
Chris Rhinehart, Director | Transaction Advisory
Nick Mullen, Senior Manager | Assurance