You are an entrepreneur and you have discovered a business opportunity somewhere. It might be that your business is expanding or you have been overstretching your resources too much. Perhaps there are a lot of unpaid invoices and you need additional cash flow to keep your operations running smoothly. These are just a few of the many reasons you may approach business lenders for a financial boost.
To get a business loan, you will either approach a bank or a private lender. Whichever option you pick, you need to know the criteria or the factors they will look at before approving your loan application.
In this piece, we shall list down a few important factors that lenders scrutinize when you make a loan application. Let’s dive right into it.
Before we go any further, credit is one of the most important factors considered by lenders before approving your small business loan. Having credit means having records of your income, transactions, expenditure, borrowing, payments, and so forth. If you have borrowed money in the past and paid it back without defaulting, you are likely to have favor in the eyes of many lenders.
Well, your creditworthiness is basically depicted by your credit score, which is often located in something called the credit report. Credit reports are usually generated by credit reference bureaus, financial organizations that keep data related to the records mentioned above for every individual and business organization with credit history.
Well, different types of small business loans have different requirements in terms of these records. As explained by Ty Kiisel from nav.com, some small business loans require a higher credit score than others. For instance, while you need to have a Fico score of 680 to get a traditional bank loan, you can get an SBA loan with 140 FICO SBSS. On the other hand, cash flow loans, online loans, and business credit cards may ask for a 600 FICO credit score.
From a general point, loans are meant to boost your finances when your resources are limited. This is why banks will feel more comfortable when you have already invested your own in a business before lending you any capital. When you have some money of your own in the business, which is possibly more than you are asking for, it is considered that you have some “skin in the game”. You will obviously be keen not to lose your investment along with theirs. When there’s no capital of your own in the business, on the other hand, most lenders will be reluctant in approving your loan due to fears that you won't work as hard.
When you are applying for a business loan, one thing is for sure. You depend largely on the profits you make to pay back the loan. No lender will be willing to approve your loan if they are not sure that you will pay them back. They will need a business plan showing all that you plan to do with the money and how you will be making profits. To maximize the chances of getting your SB loan approved, your business plan has to be solid and portray a high possibility of working out. When getting the loan to expand your business, the lender will also be curious about how the business has been performing. A strong track record will come in handy in this situation. Lenders are very reluctant to lend money to desperate borrowers. You, therefore, need to show it's not that you need the cash but if you had it, you would make quite good use of it to uplift your business.
One thing to keep in mind is that lenders and especially banks won’t lend you any money if they don’t trust you. Even if you have enough collateral to pay off the loan, if they are not sure about your character and don’t trust your capability to handle a business and make it profitable, they won’t approve your application. They will be especially keen on your experience, education, and general industry knowledge to trust that you can effectively and successfully manage a business and make it profitable. Your debt history will play a great role in creating a good reputation for you.
The main concern that any lender has at heart is how they are going to recover their money and with interest. Therefore, everything they are going to look at about your application is to determine if you are capable of paying them back. This is majorly why they will look at your business plan to make sure the cash is being invested in a profitable venture.
As mentioned earlier, they also look at your character based on your credit history and determine if you are trustworthy. You may qualify in all these aspects, but one thing is for sure. Lenders will want to make sure that in case you default, they can still get their money. Therefore, another thing they will take into consideration before approval is if you have assets worth the amount you want. Especially with bad credit, they can take these assets as collateral, just in case you do not repay the loan as agreed.
Some factors are beyond the control of the business owner but affect the performance of any business. These are things like the economy, politics, and industrial trends. Lenders will analyze the possibility that your business will grow and make a profit based on what you have control of and what you have no say in.
Many businesses reach a point where they need a loan to stay afloat and remain operational. Small business loans also come in handy when expanding and increasing the revenue base. Nonetheless, getting your business loan approved by any lender will take several considerations. When you know the factors to be considered, you can prepare adequately to ensure your loan is approved.