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There are several small business financing options to choose from when starting or expanding a business. Loans remain the most popular. But what factors do banks and lenders consider when approving an application?
In this article, you’ll learn about 6 factors that determine how hard it is to get a business loan. We’ll also look at how to work on them to increase your chances of getting accepted.
When evaluating a business loan application, lenders will carefully consider the company’s characteristics to determine whether they meet the lender’s requirements.
Key Factors in Lenders’ Decision-Making Process
The most important factors for lenders are:
- Cash flow
- Credit history
- How long the business has been operating
These factors will significantly affect the approval and the interest rate of the loan. Let’s take a more detailed look at these factors, along with 3 more.
1. Loan Amount
The loan amount depends on many things, ranging from the type of loan to the line of business and the company’s cash flow.
Always remember that the loan amount you request differs from what you will actually receive. Lenders will assess your loan application by considering all the factors to determine the maximum amount of money you can borrow.
2. Collateral
Some lenders require the loan applicant to provide collateral as a safety net in case your business cannot repay the loan.
Collateral can include physical objects with value that include but are not limited to inventory, equipment, building, etc.
If the business assets cannot cover the loan amount, you must include valuable personal items in the collateral to make up for the difference.
Businesses that do not have any assets to offer can look into no-collateral business loans.
3. Cash Flow
A business’s cash flow is one of the top aspects that lenders consider. A healthy cash flow indicates that the company has enough revenue to keep the business afloat and repay the loan.
Lenders usually have minimum revenue requirements, with some setting the limit to as low as $10,000 annually. That said, traditional lenders set up high cash flow limits. Many of them require a minimum of $100,000 annual revenue.
4. Business Plan
Lenders don’t always require a business plan, but writing one is a good idea. It will enable the lender to assess the business’s ability to generate revenue and repay the loan.
A well-written business plan will provide lenders with a clear understanding of the business’s potential revenue. As for an established business, the lender may only want proof of cash flow and revenue.
Check out the Forbes’ best startup loan’s list to see if you’re eligible for any of them.
5. Credit Score and History
Regardless of the loan that you’re applying for, credit history plays a crucial role in determining your eligibility. Having a good credit track-record can boost your chances significantly.
Credit history provides the lender an insight into how well you and your business have previously dealt with debt. They will evaluate the business and personal credit scores thoroughly when making a decision.
The minimum credit score needed for a business loan varies from one lender to another. Generally, traditional banks and credit unions usually ask for a credit score of 700 or more. However, some online and alternative lenders might consider granting a loan if your business has a credit score in the mid-500s, as long as its financial health is solid in other aspects.
Using a background check website such as Information.com, you can get a good idea of what financial information about you is available in the public records.
6. Time in Business
Lenders are more likely to approve a business loan for a company that is well-established and has been around for a long time. This is because lenders view a track record of success as an indication that the company is well-managed and that the loan will be repaid on time.
Traditional banks typically require at least two years of business history before approving a loan, but other lenders may be willing to consider newer businesses or startups.
So How Difficult Is It to Get a Business Loan?
As a loan applicant, you only need to convince the lender that your business is profitable. Based on all of the factors above, your application should suggest that you will be able to pay back the loan.
You should be able to secure a loan without much difficulty if the above-mentioned conditions are met. However, if your business is struggling financially, you should hire a finance consultant.
