short term small business loans

6 Factors Lenders Use To Approve Business Loans

One of the most difficult aspects of starting your own business is getting the appropriate amount of funding. This reality is especially true if your business requires expensive equipment in order to operate.

While taking out a business loan is a common practice for new entrepreneurs, not everyone is approved for the amount they ask. In fact, there is a handful of factors that lenders use to determine an applicant’s reliability.

Not sure where to start? Don’t worry, we have got you covered.

Let’s take a look at everything you need to know about what influences your ability to secure business loans.

1. Your Business Credit Score

While it may be unknown to many entrepreneurs, businesses have a credit score.

As you may expect, it functions similarly to how a personal credit score does. Unfortunately, not having a score at all is along the same lines as having a bad score.

Factors that influence this number include the size of your company, the stability of your industry, and your repayment history on past business loans.

If you have never taken out a loan before, it’s possible that your prospective lender may reject your application because they can’t define your reliability to make payments.

2. Your Personal Credit Score

It may seem odd that both your business credit and personal credit are attributes that lenders take into consideration, but it’s a necessary caution for them to take.

This number ranges from 300 to 850, with a score above 740 being considered ‘Very Good.’ A score under 580 is considered ‘Poor.’

What they are looking for here is your ability to make payments on your debt even if your business does not perform as well as you would like. So, those with poor personal credit may be seen as a risk when it comes to funding.

Similar to business credit, factors that influence your personal credit score are the length of time you have had open accounts, your repayment history, etc.

Missed payments are also a large factor. While most credit providers allow you to make one late payment with no penalty, consistently paying your credit bill late can drastically lower your score over time.

This behavior also shows your potential lender that you might not be able to reliably repay them due to being financially strained or irresponsible.

3. Your Company’s Revenue Trend

Not every company requires funding as soon as it is founded. Some business owners only need to take out a loan after the first few years have passed and they begin to scale outward.

Even though your business may not be the size you would like it to yet, it should still be growing.

For example, let’s assume that you own an athletic apparel company. The revenue you have made over the past three years covers your overhead and provides you with a stable income, but your performance has not noticeably improved.

In fact, your most recent year’s performance was actually worse than your first year’s.

So, a lender may take this lack of growth as a sign that you may not be able to reliably pay off your debt to them with business revenue alone.

4. Your Current Business Debt

When deciding on whether or not to provide you with funding, lenders place a strong emphasis on the amount of debt your business currently has. Your company’s annual debt payments and cash flow are basic attributes used to determine if your company can handle new debt.

While there’s no ‘magic number’ that serves as a threshold you can cross to secure funding, most lenders are fairly reasonable. If you have a significant amount of business debt but have astronomical growth and revenue, you likely won’t have any issues getting approved.

You do not need to break sales records every quarter, though. As long as your company’s growth exceeds the standard for your industry, you will likely be seen as a reliable applicant.

5. Business Age + Structure

Unfortunately for many new entrepreneurs, approximately half of all small businesses fail within the first five years. As you may expect, this can make lenders reluctant to provide financing to companies that are brand-new.

So, once your company has passed the five-year mark, you will often have an easier time securing money that you need.

The similar factor that lenders consider is the structure of your business.

A young company with a handful of owners is often seen as more financially reliable due to the larger pool of money to be pulled from. Similarly, inventory also plays a role.

If your business has consistently had a surplus of its inventory, then it could be viewed as being mismanaged. It will be assumed that the business cannot perform up to the industry standards.

6. Collateral

Since business loans are often tens or hundreds of thousands of dollars, it is a large risk for the lender to provide them.

A borrower who offers collateral, though, will help mitigate this risk. Common collateral for business loans includes:

  • Vehicles
  • Home
  • Land/other property
  • Cash savings
  • Business inventory

The more collateral that the borrower offers, the more likely it is that the lender will consider financing them. For those with a poor credit history or a young company, this route is the one to be taken.

Meeting The Standards For Business Loans Can Seem Difficult, It doesn’t have to be.¬†

With the above information about  business loans in mind, you will be well on your way to making sure that you have the best chance possible of securing funding.

Want to learn more about what small business loan programs you can take advantage of? This page has plenty of useful info.