Acquiring funding for your business is necessary for most businesses to grow, although you might think it is hassle. The process becomes less frustrating when you understand where the lenders are coming from. Today we will go over the elements of your loan application that lenders consider when looking at it and decide whether to approve you or not.
Filling Out the Form
The first thing a lender checks is if you filled out the application correctly and if you followed their instructions. It is a terrible way to get started if you messed up your application. It might not completely prohibit you from getting financing, but it will not make you look good. When you have the application in front of you, read the application first before you fill anything in. After you fill it out, make sure to double check everything once you are finished. Maybe you made a mistake or have second thoughts about something you filled out originally.
Personal and Business Credit Scores
Your credit scores play a huge rule in the eyes of the lender. They will look at both your personal and business credit scores to get an idea of how creditworthy you are or if you have any issues with making payments on time. Your personal credit score should be at least 700 but if it is higher that is better. Business credit scores work differently because they vary depending on the system but ideally you want to be over 80. Before you fill out any applications, make sure you get both scores in order so that you improve your chances of getting approved.
The Business Plan
Your loan application will live or die based on your business plan that you present. Not only do you want to create and update a solid business plan to impress lenders, but it is also an important document that helps your business grow at a healthy rate. Do your research on how to professionally write a detailed business plan. This will show that your business is prepared for the future, no matter what obstacles come towards your way.
Age of Business
If your business is under 1 year old, it will be hard to find a lender because lenders typically look for those in business for more than 2 years. If you need start-up funds, most small business owners will turn to their own personal savings, family, friends, or angel investors.
Amount of Cash Flow
Lenders will look at your financial documents very closely, such as your cash flow statement. If you have insufficient cash flow, it can be fatal for small businesses, especially those that are just starting up. You want to show that the company has enough cash coming in on a regular basis to make payroll, pay rent, and buy necessary inventory.
Lenders want to understand what industry your business fits into. They applications for all sorts of ventures and they give an idea of what types of businesses are safe to invest in. Risky industries include restaurants, construction, and farming. You can get over this if you just have a good credit report and solid business plan, but you need to first research to see where your industry lies in the eyes of the lender.
Most small business loans are secured loans, meaning that the lender will want you to have some assets such as property, vehicles, or equipment. They will look to collect these as collateral in the case that you default. Before you start searching for financing, list out your personal and business assets. Think about what you would be forfeiting to get a loan.
If your business has a lot of loans, you will be seen as a riskier investment for new loans, even if you keep up with your loan repayments. Debt utilization is a critical criterion that credit bureaus use to decide credit scores. Lenders look at this data to see if you are using too much credit that is available to you.
The Bottom Line
Lenders pay attention to the size of the loan you are seeking. If it is too large, lenders think it is too risky. If it is too small, it is not worth the effort. Be sure to think hard about what amount of money will help your business expand sustainably.