What Banks Actually Look At
for a Commercial Loan

I've reviewed hundreds of commercial loan files — first as a commercial underwriter at a Montana regional bank, and today as part of 406 Consulting Group, where we still actively underwrite loans for a local bank here in the Flathead Valley. I can tell you with certainty: most business owners walk into a loan meeting without understanding what the underwriter is actually looking for. That gap costs them approvals, terms, and time.

A commercial lender isn't evaluating whether you're a good person or whether the business has potential. They're answering two very specific questions: Can you repay this loan from your operating cash flow? And what happens to the bank's money if you can't?

Everything in your application — financials, credit score, collateral, business plan — is evidence the bank uses to answer those two questions. This article breaks down exactly what underwriters look at, what each element means in plain language, and how to position your Montana business for approval.

Commercial lending is not personal. I used to tell borrowers this directly when I was on the underwriting side: "I want to say yes — help me build a file that lets me do that." The problem is that most business owners don't know what the underwriter is looking at, so they submit files that make the job harder, not easier.

In 2024, the Federal Reserve's Small Business Credit Survey found that 47% of small business loan applicants were denied or received less than they requested. The most common reasons: weak credit history, insufficient collateral, and inadequate cash flow documentation — all things that can be addressed before an application is submitted, if you know what to prepare.

Here's what actually happens after you submit a commercial loan application at a Montana community bank — from the inside:

Every missing document adds a week to the process. Every exception that surfaces mid-review adds another round of back-and-forth. The business owners who close loans fastest are the ones who walk in with a complete, reconciled, well-organized package — not the ones with the highest revenue.

You've probably heard of the "5 C's of Credit" — character, capacity, capital, collateral, and conditions. That framework is accurate, but it's too abstract to act on. After reviewing hundreds of loan files, I've distilled it into six dimensions that map directly to what underwriters actually measure. We call it the LENDER Framework.

Liquidity is your business's ability to meet short-term obligations — and, more importantly, its ability to survive a rough quarter while still making loan payments. In my underwriting work, I run a stress scenario on every deal: what happens to this business's cash position if two large receivables pay 30 days late simultaneously? If the answer is "the business can't make its loan payment," that's a problem before approval ever happens.

Before applying for a commercial loan, calculate your current ratio and run a 90-day cash projection assuming your two largest receivables pay 30 days late. If the numbers don't hold, that's the first weakness to fix before you submit anything.

Net income on your tax return is not what lenders use to evaluate repayment capacity. They use EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization — and for owner-operated businesses, they add back excess owner compensation above a market-rate salary. This is one of the most misunderstood elements of commercial underwriting.

This is one of the biggest reasons business owners with profitable companies get declined — they hand the bank their tax returns without an addback schedule. If your accountant has been aggressively minimizing taxable income (which is smart for taxes), your net income may look too low to support the loan you need. The fix is a properly prepared addback schedule, not changing your tax strategy.

Lenders also want to see a trend, not a snapshot. Three years of growing EBITDA tells a different story than one strong year following two weak ones. If your business had a pandemic dip and a strong recovery, be prepared to explain it with specific context — "we lost our primary hospitality client in 2020 and replaced that revenue with two long-term construction contracts by Q3 2021" is a story the credit memo can tell. "COVID impact" with nothing further is not.

Two businesses can have identical cash flow and DSCR — but radically different balance sheets — and the lender will treat them very differently. Owner's equity is the cushion that absorbs losses before the bank does. The more equity you have, the more risk the bank is willing to share with you.

Most conventional commercial lenders want a debt-to-equity ratio under 3:1. SBA lenders are more flexible on this metric, but they have other requirements that compensate. If your balance sheet is heavily leveraged, the fix isn't fast — but it is predictable: retain earnings rather than distributing them, or inject personal capital into the business.

If you learn one number from this article, make it DSCR. The Debt Service Coverage Ratio is how lenders quantify whether your cash flow is sufficient to cover your loan payments — both what you already owe and what you're requesting. In my underwriting work, every deal starts and ends with DSCR.

If your DSCR comes in below 1.25x, the fix may be simpler than you think: pay off a smaller existing loan before applying, reduce owner distributions to show more retained cash, or request a longer loan term to reduce the annual payment. Run the numbers before you submit anything.

Commercial lenders evaluate the business — but they also evaluate the person running it. I've seen financially strong businesses get declined because the owner had no relevant industry background, and I've seen marginal files approved because the owner had a 20-year track record in the industry and had successfully managed debt before. Experience is a real underwriting factor, not a soft consideration.

If you're a first-time business owner or under two years in operation, the SBA 7(a) program is not a consolation prize — it's the designed pathway for building commercial lending history. Use it strategically: a small SBA loan repaid cleanly positions you for conventional financing on the next round.

Every commercial loan has a primary repayment source, a secondary, and often a tertiary. A bank approves a loan when it's confident in the primary — but the underwriter documents all three, because the credit committee wants to know exactly what happens in each failure scenario.

Collateral types and typical loan-to-value (LTV) ratios at Montana banks:

Service-based businesses with few hard assets often face a collateral gap. Options: pledge personal real estate as additional collateral, use SBA programs with lower collateral requirements, or — for smaller amounts — look at unsecured SBA microloans. Don't try to conceal a collateral gap. Address it directly in your loan narrative with a proposed solution. Underwriters respect transparency; they penalize evasion.

A loan application is a sales document. It's making the case — in numbers and in narrative — that your business is creditworthy and the bank's money is safe. Loan officers review dozens of files. A clean, complete, well-organized package signals a well-run business before the underwriter reads a single number.

From my time on the underwriting side, I can tell you exactly what kills applications before they reach the credit committee: mixed personal and business expenses in the bank statements, missing years of tax returns, financial statements that don't reconcile to bank deposits, no explanation for revenue spikes or dips, and a loan narrative that says "to purchase equipment" with no further context. These aren't dealbreakers if caught early — they're problems when the underwriter discovers them mid-review.

Montana's commercial lending market is dominated by community and regional banks — Glacier Bank, First Interstate Bank, Whitefish Credit Union, Opportunity Bank, and Freedom Bank Montana — alongside national SBA lenders. Each has its own credit culture, but several Montana-specific patterns are worth knowing before you submit.

Because 406 Consulting Group actively underwrites loans for a local Montana bank, we have a real-time view of what's being approved, what's being declined, and how deal structures are shifting in the current rate environment. That's not something you get from a general financial advisor — it's inside knowledge that directly benefits every client we take through our loan readiness program.

A declined commercial loan is not necessarily a dead end. In most cases it's a gap-identification exercise — the bank is telling you exactly what needs to change before you reapply. Here are the five most common reasons I see Montana businesses denied, and the specific path to fixing each.

Frequently Asked Questions